New FDI norms unlikely to meet objective of higher inflows

Mumbai: Relaxation of the foreign direct investment (FDI) norms by India in many sectors is unlikely to meet the desired objective of upping flows or aiding growth anytime soon, a report said on Friday.

In a note, India Ratings and Research, a unit of global rating agency Fitch said visibility on demand is necessary to attract "meaningful flows" and a broad-based economic recovery will be critical for attracting flows.

The Government had on Wednesday announced moves including 100 per cent FDI in contract manufacturing and coal mining, as it seeks to up the sagging economic growth.


The measures are "unlikely to have an immediate effect on Indias economic growth and/or capital flows into the country," it said.

On the decision to allow 100 per cent FDI under the automatic route in contract manufacturing and coal mining, it said such a move can facilitate significant domestic and foreign investment but only if structural demand-side headwinds and regulatory challenges are addressed.

"Considering the slowdown in global and domestic demand conditions, increasing the FDI limit by itself is unlikely to be sufficient to attract greater long-term FDI flows into the economy," it said.

It elaborated that the coal sector requires ease of doing business to be enhanced significantly through measures like rationalisation of regulatory procedures like the land acquisition.

The agency added that private sector investment in captive coal mines are "minimal" owing to these regulatory challenges and uncertainties, along with lack of excavation infrastructure.

On the contract manufacturing front, the agency said the move to have 100 per cent FDI will open the gates for global electronic goods manufacturers to set up shop in India and also overcome their concerns on intellectual property rights.

"Once the economy witnesses a revival, the ability to raise up to 100 per cent FDI will augment the financial flexibility of new entrants in the contract manufacturing segment," it said.