Subrata Majumder
Engulfed by high import of gold and oil, along with decline in invisibles, current account deficit (CAD) made a historical jump, causing a paranoia for debt trap in the imminent future – reminiscence of 1991 crisis. In 2012-13, CAD increased to 4.8 percent of GDP. Caught in the ambivalence of external commercial borrowing, which made a whopping increase by 21.2 percent, and the total FDI plunging by 21 percent, less rooms are left to set off the alarming CAD.
The, only and the major, rescue measure available is to increase FDI flow in the country. But, it too lost its sheen after the debacles in FDI policy in Multi-brand retail. Since the policy was introduced in September 2012, not a single FDI proposal was made for Multi-brand retail. Instead, multiple clarifications were sought by the exacerbated foreign investors for the viability of the policy. It took nine months to clarify the queries. Even then, they failed to enthuse the foreign investors. The foreign investors’ clamour forced the Commerce Minister to revisit the policy and consider for further simplifications
This means that another set of time periods is required to give fine tune to the policy to woo the foreign investors. Paradoxically, while the special Committee under Ministry of Finance took only three months to recommend a new policy for relaxation in FDI, it took nine months for the Ministry of Commerce and Industry to clarify the foreign investors’ queries on Multi-brand retail.
Apprehending surge in CAD, Finance Minister P .Chidambaram rung the alarm bell in his budget speech for 2013-14 He asserted that the country should find US$75 billion over the next two years to finance the current account deficit. A special committee was set up , headed by Secretary Arvind Mayaram, to recommend the panacea for improving the FDI flow. The Committee observed that the main hurdle in FDI flow was the sectoral cap in specified industries. These industries, though sensitive, warrant for high potential for FDI. Accordingly, the Committee recommended for the rise in FDI cap in these industries. It recommended increases in cap on FDI limit in multi-brand retail from 51 to 74 percent, telecommunication from 74 to 100 percent, insurance from 26 to 74 percent, defense production from 26 to 49 percent, airlines from 49 to 100 percent and public sector banks from 20 to 49 percent
However, and the evidences suggest, that the main concern for the foreign investors was not the cap on FDI, but the policy ambiguity and yearning for a FDI friendly policy. China and Thailand – the two emerging destinations for FDI – too have restrictions for FDI in retail. But they did not pose glitches for the foreign investors to invest in retail. For instance, in China FDI in retail are restricted in sensitive areas like agricultural products, edible oil, tobacco, agricultural chemicals, fertilizers and FDI in multi-brand are restricted by number of chain stores,, viz, 30 numbers. In Thailand, FDI in retailing is restricted by benchmark of minimum investment
Notwithstanding, FDI failed to enthuse the foreign investors. No doubt, the global slump and financial instability in USA and Europe had an adverse impact on the growth of FDI inflow in the country. But, more than this, the paramount factor which impeded the FDI flow was the complex policies and procedures, which turned unfriendly to the foreign investors.
It is irony that while the Finance Minister P. Chidambaram is running wall to wall by visiting the prospective investing countries with a begging bowl to invest in India with an aim to hedge the current account deficit from rising above the alarming level of 2.5 to 3 percent of GDP, the Ministry of Commerce, the mainstream to promote a friendly FDI policy , is shackled by bureaucratic tangles , causing delay in unveiling the simplified policy.
At this juncture, can India afford to make an inordinate delay in announcing a practical and viable policy to woo the foreign investors? It is noteworthy to mention that India has always been compared with China as potential investment destination for foreign investment. After Lehman shock, FDI initiatives ebbed in China due to slump in export markets in USA and Europe and the cascading impact on high wages due to up valuation of Chinese renminbi. Wages in China sparked by 30 to 35 percent over the past two years. China has also failed to raise domestic demand by infusing big monetary supply.
Given the situations, large opportunities are unleashed for diversion of FDI from China to India. India scores on several points to edge out China to woo foreign investment. China is loosing cost competitiveness due to rise in wages. It faces sloth in domestic demand due to weak base of consumption oriented growth. Against this, India pitched for high personal consumption base growth. In India, ratio of personal consumption to GDP is 57 percent as compared to 35 percent in China. Doing business in domestic market in China is one of the toughest qualitative barriers for the foreign investors. It is hamstrung by institutional weakness such as weak payment discipline, widespread counterfeit, stifling regulatory measures and drying up of working age population.
During the past two to three years, India’s retail sector made a phenomenal growth. It experienced a growth over 10-11 percent between 2010 and 2012 and is expected to increase by 19 percent by 2015. The retail market size was estimated at US $ 518 billion in 2012 and is expected to increase to US $ 750 -850 billion by 2015. At present, the retail industry is largely unorganized. Only about 6 percent of retail is in the zone of organized sector. The rapid rise in disposable income, commensurate with better GDP growth, will emerge a driving force to shift the unorganized retail into organized sector. The Modern Retail sector is expected to grow by over 26 percent by 2015. FDI in retail will bring a positive impact to modern retail. It is expected that impact will be felt by 2015. FDI in retail is estimated to flow to the tune of US $ 15 billion over the next five to six years, according to an estimation (by IRIS Business Service Ltd). This means that FDI in retail will alone bring about one-fifth of Finance Minister’s requirement of US $ 75 billion to bring back the CAD in the comfortable zone for the economy.
These warrant for an immediate friendly and complex free FDI policy to woo the foreign investors. Before the global investors sink into financial mess due to currency volatilities and the economies in South East Asia and Brazil emerge the potential investment destinations, India should be proactive to demonstrate its potentials by easing the bureaucratic red tape and unveiling the transparent policies.
(The author is Adviser, Japan External Trade Organization JETRO, New Delhi. Views are personal).
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