India on 16th July 2013 eased the norms for
Foreign Direct Investments (FDI) in 11 sectors including Telecom, Oil and Gas
and Defence. This was done to stop the slide of the INR against the USD,
attract capital inflow and start economic growth.
What is FDI?
FDI is investment by a company by buying another company or
diversification in business in a country other than its home country. The
investments through FDI route brings in money which can help growth of economy.
FDI helps generate employment, better quality goods and
services.
At this juncture India needs a lot of investment activity
especially from foreign players to help restrict the slide of INR against USD
as well as help improve the CAD. A push in the FDI can result in giving an
impetus to the weak Indian economy and put it on a growth path. The pertinent
question though remains if these reforms are a too little too late, we will see
one by one.
1.
The
INR has tumbled to historic lows of 60 to a Dollar, the damage to the INR is
already done and the effort now looks like pouring water when the fire is
raging. Futile to say the least.
2.
RBI
tried to stem the fall in INR by increasing interest rates for banks by 200
bps. But it helped for only a day.
3.
The
FDI limit in telecom is increased from current 74% to 100%. We could not find
stake buyers when the limit was 74%, it is highly unlikely that we will find
any takers even at 100%. This is partly due to the fiasco of retrospective tax
on Vodafone.
4.
Defence
sector is opened for FDI on a case by case basis. This step is welcome but the
GOI has to take care that there is no security breach and the case by case
approval does not mean scope for more bribery.
5.
Barring
petroleum and gas the other sectors did not need big ticket FDI. Petroleum and
gas FDI will help the exploration and extraction activity and boost the sector
in a big way.
6.
Merely increasing FDI limits in various
sectors is not going to help. Implementation is of utmost importance when any
policy decision is taken, and the track record of implementation in India is abysmal.
India lost out on two big steel projects on 17th July, just a day
after the FDI limits were raised, due to red tapism
7.
FDI
in multi brand retail was announced last year but till date there is no taker
for it. Not a single rupee has come for FDI in multi brand retail.
8.
At
this point of time interest rates in India are at a very high level which puts
Indian competitors at a risk vis-à-vis, their foreign counterparts.
9.
The
incumbent Government has only one year in hand and investors would be very
sceptical of investing at this point in time. There may be policy change when a
new government comes in next year and no investor would like to take that risk.
10. The Indian economy is currently
gripped with the vicious circle of dwindling rupee, high interest rates and
high inflation. The interest rates are unlikely to come down in a hurry which
will also reduce tax collection of the Government which in turn will require
more borrowing from it pushing the interest rates northwards.
Unless business confidence rises in
the country, there aren’t going to be any takers for the FDI. The latest
blitzkrieg by the Government looks to be futile and a deep investigation into the
systemic problems of the Indian economy can only help in saving the economy
from complete collapse.
