FDI cap hike: promises to keep

Though the govt has taken a stand to hike FDI in sectors ranging from insurance to retail, something ought to be done to regulate labour markets, strengthen financial markets, and ensure adequate supply of water and power to improve the investment climate
Will the government step on the gas for the entry of FDI? This is the question being asked by most votaries of liberalisation and globalisation. Apart from the high-profile announcements on insurance, banking, civil aviation and more recently telecom, it’s largely been ‘work in progress’ for sectors like pension and retail.

The usefulness of hiking the FDI limit in sectors like banking, telecom and insurance is still a subject of academic debate.

The country, however, saw a sharp hike in FDI flows through ’04, wherever it has been allowed. According to government data, between January and June ’04, FDI flow into the country was almost $2bn, about double the $1bn level recorded in the same period of ’03.

Investment bankers feel that the government has been able to do away with a lot of red tape in foreign investment approvals. The recently set up Investment Commission is expected to give this a further boost. Bankers say that it’s not the controversy over the few troublesome sectors that’s holding back FDI.

A World Bank report on the country’s investment climate in ‘04, says it is labour regulations, weak finance and capital markets, water supply and power, that are impeding investment.

There is, however, no doubt that investors will watch with interest how far finance minister P Chidambaram manages to implement his promises on FDI, made seven months ago, when he stands up to announce the proposals of the UPA government’s second Budget on February 28, ’05.

He had said FDI has the potential to add a competitive edge, especially in the industrial sector. The Common Minimum Programme declares that FDI will be encouraged and actively sought, particularly in areas of infrastructure, technology and exports.

He even proposed to raise the sectoral cap for FDI in telecommunications from 49% to 74%; in civil aviation from 40% to 49%; and in insurance, from 26% to 49%.

The minister for human resources development, Arjun Singh, has already stretched the agenda for FDI in higher education to April ‘05. He recently told a business chamber that the government will take a final view on entry of foreign universities into India by April ‘05.

The ministry has set up a panel to look into the issue, following instructions from Prime Minister Manmohan Singh.

In retail too, the government’s mid-year review has said there is a need to allow investment from overseas. It said this will promote value addition for agricultural products and could take advantage of the emerging national level common market to give a boost to agricultural income.

The overall size of the retail market in India is estimated at Rs 5,88,000 crore, of which the unorganised sector is worth Rs 5,83,000 crore. The share of the organised market, calculated at Rs 5,000 crore, includes organised food and grocery at Rs 600 crore.