Faced with a persistently sagging investment rate, the Centre could not have chosen a better time to raise foreign direct investment caps across a slew of sectors. Along with steps taken to ease procedures to set up and conduct business, this push has the potential to lift annual FDI inflows above the $70-billion mark (against the $55-billion flows in 2015-16). The Centre has further liberalised FDI flows into defence and aviation, after having opened up construction, pensions, insurance and plantations over the last two years. Aviation may see a change for the better, with overseas entrepreneurs other than airlines being allowed to invest 100 per cent under the automatic route in setting up a new airline, against 49 per cent so far. Airport modernisation too has received a boost with 100 per cent being allowed in brownfield investment under the automatic route, against 74 per cent at present. Connectivity is set to improve with costs falling as well, at current levels of oil and metal prices. This could boost tourism and employment in ground-handling services. In another move that could transform the food processing sector, and with it the fortunes of agriculture, the Centre has allowed 100 per cent FDI in the marketing of processed food. A relaxation of local sourcing norms for single-brand retail marks a bold push to wean majors such as Apple away from China. While this move seems to sit awkwardly with the ‘Make in India’ initiative, the challenge is to ensure that both employment generation and technology transfer take place over time.

Twenty-five years after industry was freed of the shackles of the licence raj and exposed to competition and know-how, it is important to be clear about what FDI flows today are expected to achieve. FDI can lift job creation in the organised sector, provided it focuses on greenfield investments rather than project acquisitions, and supplements rather than supplants domestic capacities. There is little clarity so far in this respect. Some RBI studies suggest that FDI’s net foreign exchange impact is uncertain. For a government that is concerned about reviving local manufacturing as well as exports, these concerns are not insignificant. The Centre must go beyond building investor confidence to developing a clearer set of objectives, learning from China’s approach to FDI. This could include identifying strategic areas, where FDI potential remains untapped, such as education, mining and non-conventional energy. At present, financial services, computers and trade account for half the FDI flows.

It is also necessary to take the quantum of FDI flows with a pinch of salt. Mauritius, Singapore and the Netherlands account for a disproportionately high share, prompting the Economic Survey 2015-16 to wonder “whether they constitute actual investment or are diversions from other sources to avail of tax benefits”. A studied approach to encouraging FDI flows, and learning from benefits and lost opportunities could help lift both investment and growth, the way it did for China.

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