Sending out the right signals
The restructuring of the FDI rules dismantles the barriers among a class of investments
For a capital-scarce economy, allowing overseas investors to deploy funds in high-growth sectors is, perhaps, the first step in seeking to spin jobs and multiply income. The government’s move to streamline the foreign investment regime by introducing a composite cap to include FDI, foreign institutional investment (FII) and other instruments is a decision which was overdue. The proximate risks of the roiling investor sentiment are three principal factors: Policy inconsistency, procedural rigmarole and political instability. With a comfortable majority in the Lok Sabha, the NDA need not worry about the third factor and concentrate only on the first two aspects. There is no gainsaying the fact that to attract capital, the government of the day shall have to remove irritants, minor as they may appear to be. Investors want hassle-free entry, and creating a raft of investment-types, on most occasions, only ends up erecting hurdles in the way of capital flow.
The simpler definitions would imply that, for all practical purposes, any overseas investment in a local company will henceforth be categorised as FDI. This effectively dismantles the barriers that existed earlier among a class of investments such as foreign institutional investment (FII), NRI capital and conventional equity-led FDI. For domestic companies it is a welcome step as it gives them greater freedom in choosing how to raise capital. To be fair, the process to make India’s foreign investment rules less ambiguous began during the erstwhile UPA, which the current government has rightly operationalised.
Investment decisions, besides yields and returns, are also guided by perception. FDI, besides bringing in the crucial dollars, also plays an ambassadorial role. Quick decisionmaking, speedier implementation and a non-interfering administration are vital for India to regain its lost status as an engine for global growth. More importantly, India should take extra care about sending out the right signals to potential and existing investors. If the next investment wave continues to remain centred on Asia, a frontline emerging economy like India cannot afford to be caught in a web of rules that have outlived their significance. The restructuring of the FDI rules is an idea whose time had come long ago.