It seems that reform has become a much abused term in India. Even a routine policy decision is being touted as reform, decibel level rises and people become excited.
There’s no doubting, of course, that the decisions to raise the FDI limits are positive. But are these game changers? Hardly. These decisions make for a good headline. But if one cuts through the clutter, one would understand the lack of substance.
Having dealt a potential body blow to India’s finances by introducing the Food Security Bill through ordinance route, this decision seems to be more of a ploy to divert the criticism and gain some brownie points in the process. Ironically, the day these measures were announced, Posco announced their pull-out of their USD 5 billion project in Karnataka.
Fact is, higher the fiscal deficit, higher will be the CAD and greater will be the headache in trying to finance the CAD. As a result, every inflow of non debt creating FDI will feel like water in parched land. To that extent these decisions make immense sense. But can these make material difference? Does not seem so.
Take the example of hiking FDI limit in multi brand retail. The decision to allow upto 49% of FDI through automatic route seems to suggest that this will lead to a stampede by potential investors. Unfortunately, after the sector was opened up to foreign investment in September last, the extent of control in the Indian operation was least, if at all, of an issue for the foreign retail biggies. The inherent foolish clauses in the then devised FDI policies in multi brand retail were of concern. Not surprisingly, there has not been even a single letter of interest, leave alone application over the last ten months. Unless these road blocks are effectively addressed, such cosmetic changes are hardly going to impact.
Come to think of it, hike in limits or approvals through automatic route would hardly matter for those global investors who have not yet entered India. This will only be of interest to those who are already in India and see the possibility of having more control on their Indian operations. To that extent, the decision to hike 100% for telecom would likely see inflows from the already entrenched companies who would want to consolidate their position. It is also imperative to have much easier rules for mergers and acquisitions to help in the consolidation process.
Even in case of defense industry, the decision to allow FDI above 26% through FIPB (non-automatic) route for those companies offering state-of-the-art technology may not meet with much success unless such companies are allowed majority stake in the Indian company. In fact, attracting high end technology into India would require much more than 26% ownership.
According to Ernst & Young, the suggested the new measures could attract up to $10bn of investment into India over the longer term. This figure in itself is an indication that these policies are not game changers.
Fact is, India is not a great place to do business. Not for nothing has FDI inflows been going downs. The need to the hour is for the government to showcase their concerted effort to remove the structural impediments holding back the economy. Only this can reverse the dipping business confidence and slowly set off a virtuous cycle of growth.