Friday, December 11, 2009

FDI Focus

The OECD’s Investment Policy Review of India, 2009 lauds India for the policies to encourage investment as part of market-oriented reforms since 1991. However, according to OECD further reforms are needed as India’s policy framework for FDI still remains restrictive compared with most OECD countries and particularly as India’s investment needs remain massive, with poor infrastructure holding back improvements in both living conditions and productivity. In its first investment policy review of India, the group of 30 developed countries, OECD has recommended further easing of restrictions on foreign investment flows to India, in areas such as banking, insurance and retail distribution where productivity levels are low and greater foreign investment could help raise incomes.

However, one cannot help but question whether it is the opening up of these particular sectors, or a policy thrust towards directing FDI to focus areas, which is the need of the hour, in order to actually promote growth with equity. In retail, the OECD has pointed out that local laws are aimed at protecting small shops and has argued in favour of opening up the sector, but given India’s socio-economic backdrop, it would only probably lead to more of inequality with employment focused more on the educated youth, for whom a lot of opportunities have already been opened up. Looking at the cumulative FDI flows between Apr-’00 to Sep-’09, in different sectors we see that the services sector already accounts for about a fourth of total FDI(21.94%). Probably the government should now concentrate more on designing policies to attract industry-specific FDI to select focus areas in the manufacturing sector, which would generate higher number of jobs while improving technology and technical skills and also on the education (now accounting for 0.35%) and health (0.67%) sectors, where long term developmental benefits would be significant. Drawing higher FDI to industries like food processing (now at 0.90%) for example could also bring greater benefits to the agricultural sector, whose growth rate has been suffering in recent times.

On the hand, in the OECD report more attention-worthy is the review’s stress on the need to expedite the judicial process in the country pointing out that for investors, significant delays in justice can mean bankruptcy and strengthening the capacity of the judicial system could make a big difference to investment.

The report has rightly pointed out that while the central government has reduced the number of approvals needed for new investment, there remains a need to streamline administrative procedures at the state level.

The OECD has also proposed to undertake joint future work on green growth, promoting infrastructure development through public-private partnerships, developing nationally consistent regional FDI statistics and launching a review of the regulatory policies of India, all of which should be extremely beneficial for the economy.