India - waiting for economic reforms

The general elections in india are expected to usher in a new government by June.
Many in India hope for a decisive government capable of undertaking much needed
economic reforms. After years of declining growth rates, lagging infrastructure and
employment, deteriorating government finances and investor confidence, economic
reforms are badly needed to push Indias economy on a higher growth path.
The present government has focused excessively on so called inclusive growth and
neglected opportunities to raise growth rates. !ubsidies on food, fuels, and fertili"ers,
have burdened the economy and the governments finances. #rowt$h rates which were
% during have plummeted to $ during .
governments current review of its &oreign 'irect Investment (&'I) policy is timely and
urgently needed to revive the flagging economy. &'I policy must boost growth,
especially of high*tech sectors and make India globally competitive. +estrictions on &'I
should be minimal, and national treatment of foreign investors should be the norm,
except for reasons such as national security. Indias &'I policy is still riddled with
unnecessary restrictions, mostly to seeking to protect Indian business from &'I led
competition. In a globali"ing world, such protection is self defeating, cannot help global
competitiveness and meet the needs of consumers.
&'I inflows into India have increased, but are still far below its true potential. ,merging
economies such as -hina, .ra"il and +ussia are doing much better. India will have to
compete with other economies to attract &'I. /hile recent &'I has recently been
allowed for multibrand retail, it is sub0ect to many restrictions that seek to protect small
retailers and do not encourage them to upgrade their services.
&'I policy sets caps on investment in different sectors. In many sectors 122% &'I is
allowed, but there are caps of 34%, 45%, and 64%. The intention of fixing such limits is
to restrict the degree of management control of the foreign investor over the 0oint
venture. 7ine Ministries advocate these limits to protect their 8!9s from competition, a
clear conflict of interest with their role in promoting healthy and balanced growth of the
sector.
&'I can be for setting up new businesses (greenfield pro0ects) or for investing in
existing businesses (brownfield pro0ects), including mergers and ac:uisitions (M;A).
The former is highly desirable as it contributes to growth, technology advancement, 0obs
and competitiveness. The latter may result degradation of competition and loss of 0obs,
a risk that must be safeguarded against. !uch assessments should be made by
regulatory bodies such as the -ompetition -ommission.
&or greenfield pro0ects that bring in high technology, sectoral caps should be done away
with and 122% &'I should be allowed. In other cases, sectoral caps should only be set
to prevent unfair competition or restrictive business practices, especially in cases where
&'I is used for mergers and ac:uisitions.

<ur policy focuses on &'I through financial transfers. =owever, &'I can also be in kind,
through inputs of high technology and capital e:uipment for a 0oint venture. This kind of
&'I in kind should be permitted, especially for high*tech industries, as is the case in
countries like !outh >orea and -hina. This would encourage companies and high tech
entrepreneurs to set up high tech operations to India.
!ome sectors of the economy badly need opening up. There is a good case for allowing
122% &'I in defence industries. /e are today importing over 3$% of our defence
e:uipment from abroad. It makes sense to allow foreign companies to set up defence
industries in India. This could not only meet India?s needs, but also enable India to
become a supplier of products and components, as has been the case with the auto
industry.
Another sector is nuclear power industry, with huge investments and technology
re:uirements. <pening up this sector to &'I will bring in foreign partners with
investment, technology and fuel supply assurances. It is better if the foreign partner
becomes an investor, rather than only being the supplier of e:uipment or the plant. This
will ensure that he contributes to making the plant work efficiently. In addition &'I would
bring in best international practices for safety and security in this sector. India cannot
implement its ambitious nuclear power programme with only domestic capital.
There are some valid concerns about national security when foreign entities are
involved. This should be dealt with by listing sensitive business activities. !ecurity
guidelines need to be notified for such activities, covering personnel and physical
assets. These should be applied to all entities carrying out listed sensitive business
activities, even if no &'I is involved. &ocusing exclusively on foreign management
control via &'I can leave many loopholes in security. Moreover security clearance has
to be periodically repeated as personnel and business operations might undergo
changes. &or example, the 9! government has uniform and elaborate security
procedures for all entities that do business with it.
.esides &'I policy action is needed on business facilitation and taxation to stimulate
investment. The business environment needs to be made more investor friendly and
simplified, so that &'I intentions are converted into actual business without delays.
+eform of &'I policy even if comprehensive cannot be in isolation from reforms in other
areas, as these contribute to the investors perception of the economy. /e need to
consider reforms in the tax system to make our investment climate competitive with
those of other emerging economies.
The feasibility of reducing the capital gains tax (62%) needs consideration, with deep
cuts for especially for high tech greenfield pro0ects. -orporate tax at present compares
unfavourably with the Asian average of 66%. +eduction would certainly stimulate
investment and capital markets and boost the economy. Tax reductions for high
technology greenfield pro0ects would also give a boost to this sector.
'r. .haskar .alakrishnan
6*3*621@
[The author is a former Ambassador of India. He has participated in the FIPB, FIIA, and
has worked for UNI!"