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Special Article

STEPS TO ATTRACT FDI

Jitender Singh

 Investment is one of the most important determinants of economic growth. India, being a developing country, need huge amount of investment to propel it’s economic growth. Investment from foreign countries is one among major sources. Foreign direct investment (FDI) complements domestic investment and fills the gap between resources available and required domestically. It not only brings capital but also transfers technology, organizational and other skills to the country. FDI is durable unlike portfolio investment as it stays in the country even during times of crises. Its benefits spill over to the poor and across regions, ensuring overall welfare. However, the impact of foreign investment on growth and poverty depends on how these investments are fitted in the domestic growth strategy.

The dynamic play of a number of factors determines the extent of FDI in a country. The returns on capital in the medium and long run can be one such factor. Transparent policy and enforcement of intellectual property rights, level of corruption, contract enforcement and tax regime are among the other important factors. Besides, cost competitiveness, availability of skilled labour force and business climate plays an important role in attracting FDI. Free market policies and democracy contributes positively in attracting FDI. Macroeconomic policies include foreign exchange policy, monetary policy (interest rate regulation), trade policy (barriers to trade), financial regulations and labour market regulations are also crucial considerations for foreign investors investing in a country.

India has performed fairly well on most of these parameters. Being the largest democracy of the world, India nurtures democratic values. Economic policies are consistent, low trade and capital barrier makes it a highly globalized economy. India’s large market size is a temptation for foreign investors, besides being one of the fastest growing economies of the world. Along with other factors, the progressive policy liberalization since 1990 has made India one of the most attractive destinations for investment. As per UNCTAD World Investment Report (WIR) 2015, India is the third top prospective host economies for 2015-2017 in terms of FDI inflows. In this direction the government is making effort s to promote foreign investment. These include liberalization of FDI policy and measures to boost investor’s confidence.

Between, April, 2000 and September, 2015, India received USD 265,143.23 million FDI. Of this, the largest 34 per cent was received from Mauritius, 15 per cent from Singapore, 9per cent from UK, 7 per cent from Japan, 6 per cent from Netherlands and 5 per cent from U.S.A. . Investor protection in Bilateral Investment Promotion and Protection Agreement (BIPA), tax benefits through Double Taxation Avoidance Agreement (DTAA) and low trade barriers by Free Trade Agreements (FTAs)has been important policy instruments for attracting FDI inflows into the country. India has Double Taxation Avoidance Agreement (DTAA) with Mauritius.Indo - Singapore Comprehensive Economic Cooperation Agreement (CECA), 2005 and India - Japan Comprehensive Economic Partnership Agreement (CEPA), 2011 are other important agreements in this direction.

At sectoral level, the largest, 17 per cent of total FDI was received in service sector, followed by construction development (9 per cent), computer software and hardware (7 per cent), telecommunication (7 per cent), automobile industry (5 per cent) and drugs and pharmaceuticals (5per cent). The government is progressively opening sectors/industries for FDI and increasing the limits of FDI in existing sectors. A transparent, predictable and easily comprehensible FDI policy framework is put in place. FDI policy lists sectors where FDI is prohibited and also the sectors where FDI is permitted subject to investment limits, entry routes and other conditions. FDI, up to 100per cent is permitted under the automatic route in most sectors / activities. Permission of the Government is not required for FDI inflow under this route but it is subject to applicable laws / regulations, security and other conditionalities.

Recent measures taken to promote FDI inflows include FDI policy reforms, measures taken to create ease of doing business and building world class infrastructure in the country. Regarding reforms in FDI Policy following steps have been taken:

(1) Construction, maintenance and operation of rail infrastructure are made eligible for 100per cent FDI under automatic route except for security sensitive areas.

(2) The definition of Non-resident Indians (NRIs) was amended to accommodate Persons of Indian Origin (PIOs) and Overseas Citizens of India (OCIs). Investment made by NRIs is deemed to be domestic investment at par with the investment made by residents.

(3) FDI up to 100per cent is permitted under the automatic route for manufacturing of medical devices.

(4) The sectoral cap of foreign investment in insurance sector increased from 26per cent to 49per cent with foreign investment up to 26per cent to be under automatic route. Similar changes have also been brought in the FDI Policy on Pension Sector.

(5) 100per cent FDI is permitted in construction development under automatic route subject to certain conditions. The conditions about floor area restriction, minimum capitalization, exit and repatriation of foreign investment, transfer of stake and operation and management has been relaxed.

(6) Subject to conditions of industrial license, foreign investment up to 49per cent is permitted under automatic route in defence sector. Beyond 49per cent under Government route is allowed on case to case basis wherever to access modern and ‘state-of-art’ technology related manufacturing.

 (7) FDI in broadcasting sector is allowed under government and automatic route. FDI up to 100 per cent (upto 49 per cent automatic route; beyond 49 per cent under government route) is permitted in teleports, Direct to Home, cable network, mobile TV, headend in the sky broadcasting services. FDI is also permitted in broadcasting content services include up linking news and nonnews current affairs TV channels and down linking of TV channels.

(8) 100per cent foreign investment under automatic route is permitted in coffee, tea, rubber, cardamom, palm oil tree and olive oil tree plantations.

(9) Manufacturer is permitted to sell products through wholesale and / or retail, including through e-commerce without government approval.

 (10) Foreign investment in Single Brand Retail Trading (SBRT) is permitted up to 100per cent where up to 49 per cent is under automatic route and above 49 per cent is under government route.

 (11) 100 per cent FDI is now permitted under automatic route in Duty Free Shops located and operated in the Custom bonded areas.

(12) 100per cent FDI is now permitted under the automatic route in Limited Liability Partnerships (LLPs) operating in sectors / activities where 100per cent FDI is allowed, through the automatic route and there are no FDI-linked performance conditions.

 (13) Scheduled Air Transport Service/ Domestic Scheduled passenger Airlines and Regional Air Transport Service (RSOP) is permitted to have foreign investment up to 49per cent under automatic route. Further, foreign investment cap of activities of Non- Scheduled Air Transport Service and helicopter services, Ground Handling Services, repair and maintenance organization have been increased to 100per cent under the automatic route.

(14) Foreign investment caps on Satellites- establishment and operation subject to the sectoral guideline of Department of Space / ISRO have been raised to 100per cent.

(15) FDI in Credit Information Companies is permitted under automatic route up to 100per cent.

(16) The threshold limit for FIPB approval has been increased to from Rs. 3000 crore to Rs. 5000 crore.

(17) 100 per cent FDI is permitted in white label ATM operations under the automatic route. In addition to FDI policy liberalization, government is continuously taking measures for creating ease of doing business. Efforts have been made to set up Commercial Courts, de-license and deregulate the industries, providing online Government to Business (G2B) services on eBiz portal, creation of Investor Facilitation Cell and improving coordination with the state governments to create ease of doing business. As per World Bank’s Doing Business report 2016, Indian ranking has improved by 4 points from 134 to 130 mainly on account of improvement in indicator of ‘starting a business’, ‘getting electricity connection’ and ‘dealing with construction permits’.The government is also building Industrial Corridors across the country to create world class infrastructure, these include Delhi-Mumbai Industrial Corridor, Chennai-Bengaluru Industrial Corridor, B e n g a l u r u - M u m b a i Industrial Corridor, Amritsar-Kolkata Industrial Corridor and Vizag-Chennai Industrial Corridor. Further, there is a need for continuous liberalization of FDI policy. Regulation should be further rationalized to create ease of doing business. The macroeconomic policies need more harmonization to maximize economic growth. Domestic policies should also be synchronized to improve spill overs effects of foreign and domestic investment.

 

(The author is Deputy Director, Department of Industrial Policy & Promotion, views expressed are personal.)