Ease of doing biz reform key to win global FDI race

It must be recognised that there remain serious lacuna in the ease of doing business here for foreign investors. The most daunting are the innumerable regulatory approvals needed both from central and state agencies for setting up manufacturing units

A survey by global consulting firm, Deloitte holds out hope that foreign direct investment flows will grow significantly in the short run despite the economic downturn being faced due to Covid-19. This is encouraging at a time when it is apparent the economy will have to grow at a rapid pace in order to return to pre-pandemic levels. The 20.1 per cent growth recorded in the first quarter of the current fiscal (April-June 2021) was on the extremely low base of the previous year. Outcomes for the rest of the year will depend largely on the speed of vaccinations and whether the expected third wave will actually take place. The Reserve Bank of India as well as many rating agencies are still betting on 9-10 per cent growth but there are many imponderables in the way of achieving this goal.

Higher foreign direct investment inflows will give support to the exchequer which is under increasing strain since last year owing to the pandemic and the contraction in economic growth in the last fiscal. The inflows have already been one of the few bright spots of the downturn as these were at surprisingly high levels even during 2020-21. The country attracted the highest ever FDI of 81.72 billion dollars during the year despite the disruption caused by Covid. This is roughly ten per cent higher than 74.39 billion dollars recorded in the 2019-20. In comparison to the rest of the world as well, India did well on this front. It remains the fifth biggest recipient of FDI inflows in 2020-21, according to the UN Conference on Trade and Development (UNCTAD). And this at a time when, global FDI inflows fell to 1 trillion dollars in the same fiscal from 1.5 trillion dollars in the previous year as a result of the pandemic.

In this backdrop, the Deloitte survey indicates that the positive trend on FDI inflows will continue in the short and medium run. Based on the perceptions of multinational business leaders in the US, UK, Singapore and Japan, it found that India remains an attractive destination for investments, especially because of its skilled workforce and prospects for economic growth.

The results of the survey are particularly interesting as it was carried out during the peak of the second Covid wave in this country. Despite the gloomy scenario at that time, apparently global business leaders remained confident in India's short and long term prospects. They were even readying plans to make additional and first time investments in the country. As many as 44 per cent of those surveyed across these four countries said they were planning additional or first time investments. Among first time investors, nearly two –thirds were planning such investments within the next two years. Given the contraction in the economy during the last fiscal and the upheaval caused by the second Covid wave in the current year, it indicates there is considerable optimism over the potential for a rebound in economic growth.

Among the factors cited for the growing interest in investing here is the perception that the country is both politically and economically stable. On the other hand, there is concern over the lack of regulatory clarity and efficient judicial redress and mechanisms. The survey was, however, carried out before the government withdrew the retrospective tax legislation and all the accompanying legal complexities. In fact, the snowballing of the issue related to Cairn Energy as well as the travails faced by Vodafone had been critical areas of apprehension for potential foreign investors in recent times. The reversal of the legislation has paved the wave for a more benign environment for foreign investments especially in terms of stability and predictability of policies.

What may be of concern for policymakers is the fact that one of the drivers for this interest in making greater investments here is the lure of the large Indian domestic market. This is especially so, according to the survey, for business leaders from Japan who are not keen to use India as a springboard for exports. The ambition to make India a global hub for exports and also part of the world-wide logistics chains may not thus be realized in a hurry.

At the same time, there is no reason that this perception cannot change with time. In fact, many of the potential investors are not fully aware of the changes made in this country to ease the process of doing business here. As a result, there is a greater preference for investing in Vietnam as compared to India especially for investors from Japan and Singapore.

Despite the upbeat results of the survey, it must be recognised that there remain serious lacuna in the ease of doing business here for foreign investors. The most daunting are the innumerable regulatory approvals needed both from central and state agencies for setting up manufacturing units. There is no doubt that some headway has been made in this direction but it is simply not enough in comparison to other attractive markets like Vietnam and Indonesia.

Though recent policy announcements seem to indicate a shift in the attitude towards business and industry, it could be too late to help several key sectors in the economy. The removal of the retrospective tax laws have been followed by major incentives to promote the health of the floundering telecom sector as well as the automobile industry. These steps, however, needed to have been taken earlier to give adequate succour to these sectors.

The Deloitte survey is thus timely and encouraging but it is time for government to push forward with more reforms to ease the process of doing business in this country. Otherwise it will lose out to competitors in this global race for FDI.