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| Experts see futile exercise in FDI facelift |
| Nayanima Basu / New Delhi Feb 04, 2010, 00:57 IST |
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Even as the government plans to give a facelift to the country’s Foreign Direct Investment (FDI) policy by consolidating all 177 press notes in an effort to bring in more clarity, it may not help in augmenting the inflows into India.
Experts say the inflows could improve only if the permitted limit on certain key sectors are increased. This, despite India attracting FDI inflows of about $1.5 billion in December last year, an over 13 per cent increase from $1.3 billion a year ago. In fact, a 56 per cent year-on-year rise in FDI inflow at $2.3 billion was recorded in October 2009, which surged 60 per cent to $1.7 billion next month as against $1.08 billion the same period a year ago.
Cumulative FDI inflows during April-November 2009-10 were $20 billion, mainly driven by automobile, petroleum and gas, IT software and hardware, telecom and power sectors. This, however, government sources said, was almost flat if compared with $21 billion inflow in the corresponding period previous year. The government has set a target of achieving $50 billion worth of FDI annually by 2012 and $100 billion by 2017.
“The release of a consolidated FDI policy is an effort towards that. We are only trying to clarify the policy. We are doing everything in a calibrated manner and constantly reviewing the caps on the sectors,” said Rajinder Pal Singh, secretary, Department of Industrial Policy and Promotion (DIPP).
Experts say the government should focus on a complete overhaul of the FDI policy to create a conducive environment for global investors. “A lot of complexities still remain. There needs to be a transparency for investors’ benefit. Importantly, there is no clarity on how to interpret the policy, the demerits of the press notes are still there. A radical change is required in the fundamentals of the policy. Policies for certain sectors have become irrelevant and should be removed,” said Ajit Krishnan, tax partner, Ernst & Young.
N R Bhusnurmath, professor (finance) of Gurgaon-based Management Development Institute, however, is of the view that too much liberalisation of the FDI policy could spell trouble. “While it is important to review the caps, a calibrated approach should be maintained. We need to go step by step,” he said. He added that consolidation of the press notes will not increase the flows though it will decrease investors’ dependency on local consultants. He said this might be the government’s first step towards making the policy more investor-friendly.
“The consolidated document is nothing but binding of all the 177 press notes under one document. This was required, as there is already a lot of confusion and overlap. But, if one studies the document thoroughly, she will find it to be another big press note with lots of ambiguity. It will not be of much help in easing the complexities concerning taxation and downstream investment,” said Ravi Trivedi of KPMG.
The ministry drew criticism when the new FDI guidelines issued last year had sought to rationalise the methodology of calculating FDI into various sectors of the economy and how the ownership would be determined in a company. This led to widespread confusion among investors, especially in the banking sector.
The issue was raised by ICICI Bank and HDFC Bank, whose ownership had come under the scanner under the new norms as foreign stake in the two banks is about 63 per cent and 74 per cent, respectively. The banks, however, maintained that they were Indian banks. There had been meetings between the Reserve Bank of India (RBI) and Dipp, but the issue remained unsolved.
“Such tinkering with the policy every now and then only destabilises it further and hampers the smooth flow of foreign equity into the country,” said Krishnan.
Commerce and Industry Minister Anand Sharma unveiled the consolidated draft policy on December 24. Stakeholders were asked to submit their comments by January 31. The policy would be finalised by March 31. Once implemented, the new consolidated FDI policy will be subjected to inter-ministerial review after every six months.
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