The Government is keen to promote economic reforms into the country, the objective being twofold – ease the widening current account deficit (CAD) and spur economic activity. The Secretary, Department of Economic Affairs, submitted a discussion paper last month recommending a hike in foreign direct investment (FDI) caps in various sectors including defence, telecommunication, banking, insurance, single and multi brand retail, aviation and media.

In the wake of widening CAD and depreciating Rupee, the Mayaram committee’s recommendations are indeed a welcome step.

Foreign investment in India is governed by the FDI policy, which provides for ceilings on foreign investment in certain sectors with no caps on other sectors. The Mayaram Committee’s recommendations should help in containing the ballooning CAD. Current account is the difference between a nation’s total exports of goods, services and transfers and total imports. India relies heavily on foreign inflows to finance its CAD; hence, a decline in gross FDI inflows last year ($ 36,860 million in 2012-13 against $ 46,556 million during 2011-12) worsened the CAD. A hike in sectoral caps should increase FDI and reduce the deficit. The economic reforms of 1991 gave a major boost to foreign investments in India; however, restrictions on FDI in India have deprived India of its fair share of foreign investment compared with its emerging peers.

The need for outward orientation

Unlike FII funds, FDI is relatively permanent capital and hence creates a long-term positive impact on the economy. Many global and well known players in insurance, aviation, retail and asset reconstruction sectors are waiting on the shores, expecting the Government to further liberalise FDI norms.

These sectors require huge investments for creating quality infrastructure, and hence easing FDI caps here will strengthen the economy. Foreign capital in retail will also lead to better infrastructure, latest technology and reduced prices, which will translate into benefits for end consumers. FDI will also aid the struggling telecom industry in rolling out new infrastructure and help local players to sell their stake and reduce high debt burden.

When foreign players commit large chunks of funds to India, they expect to have a greater say in the control and management of investee companies; a lower FDI cap restricts foreign investors to exercise control. An uncertain regulatory regime and judiciary only adds to their woes. Hence, easing FDI caps and other regulatory hurdles is the need of the hour.

In the past, FDI has been an integral part of India’s growth story. Perhaps, if implemented positively, these recommendations along with other policy initiatives could prove to be a boon for the present state of the Indian economy.

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