Times are tough. There seems to be no running away from that fact anymore. India’s growth story has stumbled, with growth slipping below 7 per cent. Sentiment and investment are down, and industrial output has been in free fall. Savings and consumption both are in decline. Many say that these are among the most difficult times the Indian economy has seen in the past decade or so. What makes the pain unique this time is that the current crisis also stems from the financial sector.
All levers of the economy are under duress. And evidently, the Modi government is taking a sectoral approach to bring the economy back to health.
Last week, the slew of announcements made by Finance Minister Nirmala Sitharaman undid some of the damage that Budget 2019 caused. This included the revoking of the foreign portfolio investor surcharge and the announcement of an upfront recapitalisation of public sector banks. Many of the interventions were targeted toward increasing the transmission of capital and fuelling demand. What followed this week was another set of announcements-these further opening up India’s economic sectors to foreign direct investment (FDI). Clearly, the government hopes to generate interest among international investors.
The government’s boldest move was to permit 100 per cent FDI under the automatic route in coal mining for open sale (as well as in developing allied infrastructure like washeries). This move challenges the government-run Coal India’s monopoly and could run into stiff opposition from trade unions-India’s coal sector was nationalised in 1973. The policy change is in line with the government’s target of mining 1.5 billion tonnes of coal by 2020, and the government also no doubt hopes that the move will generate investment and industrial activity. This would reduce India’s coal import bill and give the economy increased access to cutting edge mining technology from across the world.
For all its nationalistic fervour, the Modi-led government has opened the economy to foreign investment far more than any previous government. If the Narasimha Rao government unshackled the economy for the first time in 1991-often referred to as India’s phase of liberalisation-Prime Minister Modi has taken that policy forward very aggressively. In the NDA government’s first term, it had encountered protests from the Swadeshi Jagran Manch when it floated the idea of increasing FDI limits in the insurance sector. However, the government’s later steps toward the opening up of sectors have been met with tacit acceptance.
While the opening up of India’s economy has not been met with much ideological opposition, the moves have not attracted much FDI either. In fact, FDI inflows to India dipped one per cent last year, falling to $44.4 billion. Last year, the government had also relaxed FDI norms in several sectors, including non-banking financial companies, single brand retail and construction. Former finance minister Arun Jaitley had announced the opening up of several sectors of the Indian economy at least three times in the first term of the Modi government. Foreign investments are crucial for India to build the roads, highways, airports and ports it needs, and to boost growth.
One hundred per cent FDI under the automatic route has also been allowed in contract manufacturing and in single brand retail. Additionally, the precise details of the 30 per cent local sourcing norms have been relaxed, and online sales are now permitted without the prior opening of brick and mortar stores.
However, the success of these moves depends on a number of details. For example, even as the government opens up coal mining for foreign investment, it continues to hold pricing power in that market. That could be a deterrent to a major international firm looking to invest. Any company that chooses to make the massive investments required would want the ability to price the coal it eventually sells. There is also some ambiguity around the transportation of coal-for instance, would shipments from Coal India be given first priority?
Liberalising norms is only one part of the solution. India’s FDI story has been somewhat standard across the decades-with the country attracting investments in service sectors such as finance and software, with one-off FDI investments coming into telecom or infrastructure. Data for 2018-19 indicates that the services sector attracted the highest FDI equity inflow-$9.16 billion-followed by computer software and hardware ($6.42 billion), trading ($4.46 billion) and telecommunications ($2.67 billion). Total FDI equity inflows for the month of March 2019 touched US$ 3.6 billion. Also in 2018-19, India’s highest FDI equity inflows came from Singapore-$16.23 billion-followed by Mauritius ($8.08 billion), the Netherlands ($3.87 billion), the US ($3.14 billion) and Japan ($2.97 billion).
However, FDI in manufacturing made for only 28 per cent of the total FDI, significantly below the average level of 44 per cent during the UPA-II government’s tenure.
India needs to actively address implementation issues and policy irritants that arise for companies looking to use the FDI route to invest in the country-competition for FDI has been intensifying. And besides the legislative aspect, the government must also step up to the challenge of convincing businesses of the certainty of its policies, and that their rights will be respected and they will not be subjected to tax terrorism.
Economists Biswajit Dhar and K.S. Chalapati Rao, in a book, India’s Recent Foreign Direct Investment: An Assessment, argue that the country needs to do a lot of homework on its FDI policy. FDI inflows are seen as a bellwether of the economy-in this context, not getting right kind of inputs can lead to serious misjudgements.
The authors cite a discussion paper on ‘Industrial Policy 2017’, circulated by the Department of Industrial Policy and Promotion, which expressed dissatisfaction about India’s FDI levels and inflows not delivering expected benefits and underlined the need for a review of the country’s FDI policy. It spoke about India’s “volume-centric” approach toward FDI, and said that such funding was increasingly being sought to alleviate the current account deficit-and correspondingly, that FDI’s role as a provider of development finance and technology had diminished.
Here’s hoping that this time around, India would be more comprehensive in its FDI policy.