India needs FDI


FDI, like many other financial acronyms, is well-established and well-known in India.

FDI stands for “Foreign Direct Investment”. And, what is FII ? It stands for “Foreign Institutional Investment”. And, so on and so forth.

FII is portfolio investment into the country’s equity and financial markets. This money is termed as “hot money” – it can flee as fast as it came in, or even faster.

FDI is investment in productive assets, it is “real” investment which stays on in the country and is almost permanent – it rarely ever flees the country.

India is hugely short of FDI, due to various macroeconomic reasons. The world is going through a tough financial crisis, and investment dollars are in short supply, etc., But, that does not portray the correct picture.

India is yet to change many of its archaic government policies on investment and labour. For instance, it has not formulated its final position on FDI in insurance, retail, and a host of other industries. How can investments flow if the investors are not sure if they would make a decent return on their investments ? How can investors put in their money if the environment is corrupted ? How can investors invest if the labour laws are stacked up against the efficient operation of a capital-labour market mechanism ?

These are only a few of the major issues. The other huge issue is the decrepit infrastructure which is crying for a huge infusion of investment and a bold policy of reform when it comes to land acquisition.

In all these important areas, India is dragging its feet, thereby delaying the flow of investments into the country. India gets much less FDI as compared to South East Asian countries even now, after a decade of promising economic growth above 7%, and a vast market waiting to be tapped.

I have written several times about the need for India to make bold economic reforms and who best can do that than our eminent economist Prime Minister Dr Manmohan Singh ? However, there is a sense of helplessness in the government and the bureaucracy and things are not moving at all. There are some weak positive signs and gestures but nothing with a bold posturing and aggressive pushing, which are needed in today’s India which is tired of inaction on the part of the government and the parliament.

Opposition Parties are viewed as hurdles today, they are not cooperating with the government even when it comes to approval of key economic policies.

At the moment, the government needs to make its intentions and policies clear to global investors. India needs and can absorb in excess of USD 25B of FDI every year for the next decade or so. For that to happen, India needs a plan.

Cheers,

Vijay Srinivasan
20th November 2011
Mumbai

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