Policy uncertainty and the time taken to meet various procedural requirements are causing a slowdown in foreign direct investment inflows to India, according to a RBI study.

The abovementioned factors have dampened investor sentiments. The slowdown in FDI comes despite robustness of macroeconomic variables, said the study.

It observed that while there had been some recovery in global FDI flows, especially driven by flows to Asian Emerging Market Economies, during 2010-11, gross FDI equity inflows to India witnessed significant moderation.

Gross equity FDI flows to India moderated to $20.3 billion during 2010-11 from $27.1 billion in the preceding year.

From a sectoral perspective, FDI in India mainly flowed into manufactures (32.1 per cent of the total); services (30.1 per cent); construction, real estate and mining (17.6 per cent); and others (20.1 per cent).

FDI below potential

A comparison of actual FDI flows to India vis-à-vis the potential level showed that actual FDI, which generally tracked the potential level till 2009-10, fell short of its potential during 2010-11, partly on account of the increased policy uncertainty.

This (the slowdown in FDI flows) has raised concerns in the wake of widening current account deficit (CAD) in India beyond the perceived sustainable level of three per cent of GDP during April-December 2010. CAD occurs when a country's total imports of goods, services and transfers exceed exports, making it a net debtor to the rest of the world.

The study pointed out that FDI is generally known to be the most stable component of capital flows needed to finance the current account deficit. Moreover, it adds to investible resources, provides access to advanced technologies, assists in gaining production know-how and promotes exports.

sectoral FDI caps

As the Indian economy integrates further with the global economy and domestic economic and political conditions permitting, there may be a need to relook at the sectoral caps (especially in insurance) and restrictions on FDI flows (especially in multi-brand retail), the study said.

Further, given the international experience, it is argued that FDI in retail would help in reaping the benefits of organised supply chains and reduction in wastage in terms of better prices to both farmers and consumers.

Referring to the main apprehensions that FDI in retail would expose the domestic retailers to unfair competition, the RBI study said that a balanced and objective view needs to be taken in this regard.

The study observed that another important sector is the generation, transmission and distribution of electricity produced in atomic power, where is not permitted at present, may merit a revisit.

The demands for raising the present FDI limit of 26 per cent in the insurance sector could be reviewed taking into account the changing demographic patterns as well as the role of insurance companies in supplying the required long term finance in the economy.

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