An overhaul of FDI policy is the need of the hour

India is the best place to be in now, say many foreign portfolio investors who have bet big on Indian equities.

There has been a complete re-rating of India over the last few months with foreign institutional investors (FIIs) pumping in nearly $16 billion into Indian debt and equities since January.

And there will be no stopping India if the new Government were to revamp the entire foreign direct investment (FDI) policy and go the extra mile.

Though it could be argued that the average annual FDI inflows of about $24 billion (in the last two years) are not a bad strike rate. But, it does fall short of expectations when compared with our potential and the inflows received by China and other Asian countries.

The UPA-II stint was marred by too many policy flip-flops, shabby treatment of foreign investors and tax uncertainty. Telenor, Nokia and Vodafone have been at the receiving end of this uncertain policy regime.

It is not just the telecom sector which faced problems. Foreign investors from other sectors such as Posco also faced the heat, especially in land acquisition.

For this Government, FDI is going to be a tough balancing act. While attracting FDI, the new dispensation has to ensure capacity building within the domestic industry. Also, it has to be ready to allow market price for technology transfer.

No foreign company is going to come into defence production or transfer technology to Indian entities if the FDI cap remains at 26 per cent. So a calibrated approach may be need of the hour.

Despite the controversies, allowing more FDI in aviation and pharmaceutical industries has only helped these sectors. All the stakeholders have benefited from the move, albeit at a cost.

The power sector is a success story. As a result of the liberal policy, the inflows in the sector more than doubled to ₹6,519 crore in 2013-14 fiscal against the previous fiscal.

But, the new Government needs to clearly outline its approach towards FDI. It has to also get its tax policies right, reform tax administration and adopt stable fiscal policy to restore foreign investors’ confidence. There is an urgent need to simplify business regulations.

The immediate action plan could be to make legislative changes for increasing the cap in insurance from the current 26 per cent. Any such hike could set the stage for more inflows into the Indian insurance and pension sectors.

Simultaneously, there could be a review of policy framework in e-commerce. There may be a case for allowing FDI in B2C e-commerce, albeit in a small way to begin with.

The education sector is also crying out for policy changes. This sector accounted for 0.43 per cent of cumulative FDI inflow from April 2000 to March 2014 at ₹4,875 crore. It has been a mixed bag for FDI in infrastructure given the policy flip-flops and implementation challenges. In the all-important oil and gas sector, global majors such as Chevron and ExxonMobil have kept away despite a liberal foreign investment regime. Uncertainty in policies and implementation are to be blamed.

FDI is permitted in road construction, manufacturing of rail-based factories, shipping, ports. However, the actual level of investments has not been significant, barring some cases such as ports.

In road construction, foreign investors such as Isolux Corsan have usually taken the joint venture route to invest, preferring to tie up with Indian firms so that they can deal with local conditions. Then there are investors such as SBI-Macquirie and Khazanah-IDFC joint venture, who are buying stake in operational toll roads.

In ports, FDI is permitted, though the investments are vetted through a security committee. The Government has also suggested similar vetting for FDI in the rail segment. In shipping, though 100 per cent FDI is permitted, foreign lines that call on India’s ports do not register in India to avoid indirect taxes.

(with inputs from Richa Mishra, Mamuni Das, Aesha Dutta, Debabrata Das, Navadha Pandey)