A Bright Future For Direct Foreign Investment In India

Monday, October 21, 2013 - 15:27

The Editor interviews Dr. A. Didar Singh, Secretary General of the Federation of Indian Chambers of Commerce And Industry.

Editor: In his visit to India last summer, Vice President Joe Biden emphasized the growth in economic cooperation between the U.S. and India and how he expects it to grow five-fold if the right choices are made. India has liberalized its trade regulations since 1991. What measures has India taken to encourage foreign trade and foreign direct investment over this time period?

Dr. Singh: The year 1991 is reckoned as a watershed year in the economic history of India. It marked the start of a “bold” and “new” economic reforms program, which continues to date. The changes that were brought about in the economic policy matrix over time have altered the very character of the Indian economy. After pursuing a strategy of self-reliance for more than 40 years, the country undertook a holistic macroeconomic stabilization programme, which included policy reforms pertaining to industry, the financial sector, trade, the fiscal front, et al.

Trade policy was liberalized to provide a stimulus to exports and reduce the degree of regulation and licensing control on foreign trade. The complex system of import licensing was dismantled along with a phased reduction in custom duties and a gradual removal of quantitative restriction on imports. Today, India is negotiating free trade agreements with a host of countries and has already concluded agreements with Chile, Sri Lanka, ASEAN, MERCOSUR, Singapore, etc.

Another big reform that was introduced on the external front was devaluating of the exchange rate and allowing the value of the rupee to be determined purely by market forces. The only time the Reserve Bank of India (RBI) now intervenes in the exchange market is when it feels that there is excess volatility that needs to be curbed.

Also, one of the most important dimensions of reforms has been opening up of the economy to foreign direct investment. It may be noted that while before 1990, we worked with a small “positive list” outlining sectors open to FDI; today we work with a small “negative list” detailing sectors that are closed to FDI.

We have tried to constantly evolve on the policy front to provide an environment conducive for investors. In fact, recently we took a step ahead with regard to further liberalizing the FDI framework in a host of sectors including multi-brand retailing, defense, civil aviation and broadcasting and pension sectors. The FDI limit in 12 sectors has been revised in July of this year. Going forward, we endeavour to keep the momentum on the reform front.

Editor: After the rupee’s plunge last summer at the time the Federal Reserve in the U.S. threatened to reduce its asset purchases from $85 billion per month, India is trying to attract foreign capital. To attract foreign capital the RBI has set up a subsidized foreign currency swap facility allowing banks to tap dollar deposits from Indians living abroad, and the International Finance Corporation (part of the World Bank) will boost the offshore market by issuing (and guaranteeing) $1 billion in bonds to foreign investors. Do you expect these two developments to give a spurt to India’s rate of direct investment?

Dr. Singh: The Fed’s announcement in June to taper off its bond-buying programme resulted in huge capital outflows from India, leading to sharp depreciation in the Indian rupee. Bringing stability to the currency has been a priority for the RBI. Accordingly, various measures have been taken to arrest the volatility of capital flows, such as reduction of Liquidity Adjustment Facility (LAF) for banks from 1 percent to 0.5 percent, tightening of the exposure norms for currency derivatives by the Securities & Exchange Board of India (SEBI) and deregulation of interest rates for certain deposits from non-resident Indians, amongst others. Some of these measures have yielded positive results, reflected in the growth in outstanding NRI deposits by around 9.5 percent up until the end of August 2013.

Last month, RBI raised the limit on overseas borrowing by banks to 100 percent of their unimpaired Tier-1 capital, as against 50 percent earlier. The central bank also offered a 100 basis points discount on the swap rate if banks chose to bring this borrowing back to India. With a subsidized swap facility, raising overseas funds through FCNR deposits has become more favourable for Indian banks now. As per some industry estimates, Indian banks can now raise about US$10 billion through FCNR deposits. 

Another significant move has been the recent launch of a US$1 billion offshore Indian rupee bond programme by the International Finance Corporation. Through this programme, IFC plans to issue rupee-linked bonds and use the proceeds to finance private sector investment in the country. This move will not only bring additional foreign investments into the country and strengthen the Indian capital market, but it will also help in a move towards internationalization of Indian currency, as indicated by the RBI governor.

Editor: India has recently liberalized the telecom rules to allow foreign investors to own 100 percent of telecom subsidiaries. Do you think this measure will result in attracting more foreign capital?

Dr. Singh: The recent decision taken by the government of India to allow foreign investors to own 100 percent of telecom subsidiaries is a positive sign for the sector as it showcases the government’s commitment towards improving the current investment climate in the telecom sector in India. This hike in FDI will undoubtedly provide more teeth to India’s National Telecom Policy 2012 in improving investor sentiments (especially that of foreign investors) and consequently aiding the telecom industry to recuperate from its debt issues. Besides being a pro-industry move, increase in FDI to 100 percent in telecom will also benefit the end consumers by means of superior network coverage.

The increase in FDI to 100 percent will enable foreign telecom operators to buy out their Indian partners with whom they had to join hands to meet the FDI norms for operating in India. This much-needed policy decision allows more flexibility to various shareholders of the telecom service providers and others looking at long-term investments in India. Cash-rich foreign companies might seek to buy out smaller players. In the longer term, this will enable additional capital inflows and increase the overall financial viability of the telecom sector in India. The decision will enable Indian telecom operators, sitting on very huge debt, to reduce exposure by bringing in cash and retiring debt through equity infusion.

Editor: India has embarked on a Five-Year Plan in 2007 that terminated in 2012. How much of that plan has been realized?

Dr. Singh: India’s 11th Five-Year Plan set out between the years 2007-08 and 2011-12 had the key objective of assuring inclusive growth. The plan period did witness a remarkable growth, and this was achieved even when the global economy was hit hard by the Lehman crisis. The average annual growth during the five-year period turned out at 8.0 percent. Though this was lower than the initial target set at 9.0 percent, it was nonetheless encouraging amidst the difficult economic situation. The vision of the plan broadly entailed charting a path of high growth to reduce poverty and create more jobs, improve access to health and education services, empower people through skill development, and assure environmental sustainability.

It is difficult to do a fair evaluation of the Plan in such few words; nonetheless, there have been some significant achievements. For instance, agriculture, which still is the mainstay for the rural populace in India, saw a discernible improvement in performance.  We have been able to manage a record food-grain production of 257 million tonnes in the year 2011-12.

Along with this, government flagship programmes like MGNREGA and Bharat Nirman have brought about a major change in the rural landscape of India. The investments in building rural infrastructure have expanded, and there has been a noticeable increase in rural wages. Also, during the plan period there has been a visible improvement in the education sector. The school enrolments at various levels witnessed an increase. Several schemes of the Centre Government like Sarva Shiksha Abhiyan, the Mid-Day Meal Scheme, the ICDS, The National Rural Health Mission, the Janani Suraksha Yojana, the Rashtriya Swasthya Bima Yojana and the Skill Development Mission have encouraged many young children to come and attend school. Not to mention, a significant growth was noted in some of the most backward states in India.

There do remain backlogs in terms of the objectives of reducing poverty, creating better jobs and bringing more and more people into the mainstream. These issues remain the top priority on the agenda, and we certainly haven’t lost sight with regard to the same. We would continue to combat these problems and seek to address them in the most comprehensive manner.

Editor: India has embarked on a $25 billion financial restructuring plan for the power industry. What are your expectations for an eventual overcoming of the power deficiency?

Dr. Singh: The per capita consumption of electricity at the end of the 12th Plan (March 2013) is provisionally calculated at 917.2 units, which is of course way below other nations (2010 figures for:  Canada – 15145 units, USA – 13361 units, China – 2942 units) and the world’s average (2892 units). The peak demand has not been met to the extent of 9 percent during the year 2012-13. What is surprising is that many of the power stations have either backed down their generations or remained idle while the country has been reporting non-availability of electricity. State power utilities, on account of their precarious financial positions, have expressed their inabilities to purchase power and rather resort to load shedding. The recently announced financial restructuring plan is an attempt by the Centre to revive India’s power sector. However, what needs to be ensured is that this effort should yield results, unlike the last restructuring in the early 2000s.

The last few years have seen an influx of existing and new players taking up power generation projects. However, there has been a slowing interest due to fuel shortages and the dwindling finances of power utilities. For the eventual success of the power sector, the entire value chain has to be remunerative, and for this a lot of measures are needed.

The onus of power sector reforms in India lies with the states, and this means not only state power utilities. With Centre as the guide and facilitator, this responsibility has to be shouldered by state governments, electricity regulators and power utilities. Only an integrated effort to move forward can make the financial restructuring plan meaningful. The reform has to be in terms of both commercial and operational functions. The costs of supply have to be adequately compensated by revenues realized, providing sufficient returns on equity. For this, the state electricity regulators have to ensure timely, transparent and appropriate tariff revisions. Theft and non-payment of bills have to be eradicated. Utilities have to ensure 100 percent metering and billing, and here the technology can play a crucial role. Modernisation and upgrading of networks have to be undertaken. Information technology can revolutionalise the operational and commercial efficiencies of the power sector, and it needs to be adopted in a meaningful way. All these needs sustain investments and a commitment to re-orient operations with greater use of technologies. Here the consumers also have to become more responsible, and a regular supply of quality power and a strong customer support system can encourage such behaviour among consumers.

Editor: There has been a growing demand for measures to combat corruption. What improvements in this area have you seen to date? 

Dr. Singh: Corruption has been recognized as one of the important factors inhibiting industrial growth. Reports and studies have shown that corruption increases transaction costs and uncertainty in an economy.

There exists the Central Vigilance Act since 2003, which has control over all central government departments. Over the last few years, India has introduced various landmark legislation to tackle corruption and bring greater accountability and transparency to government activities. The Right to Information (RTI) Act, passed in 2005, granted citizens the legal right to access information held by their government. With RTI has come greater awareness and the realization that corruption can be effectively tackled; people recognize that the government is accountable for their money, and misappropriation of funds has an impact on the general public. RTI is currently being used to redress individual grievances, access entitlements such as ration cards and pensions, investigate government policies and decisions, and expose corruption and misuse of government resources.

India has also ratified the UN Convention Against Corruption, which is a legally binding international anticorruption instrument. Additionally, there are important corruption related bills under consideration, namely the Public Procurement bill, the Prevention of Corruption bill, and the Prevention of Bribery of Foreign Public Officials and Officials of Public International Organizations’ Bill.

 

For more information, please visit the website of the Federation of Indian Chambers of Commerce at www.ficci.com.