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Abu Dhabi, UAEMonday 17 December 2018

India's push for clarity drives foreign direct investment

'Moves will go a long way in building confidence for investors and significantly enhance the ease of doing business in India'

India's Prime Minister Narendra Modi speaks during the inauguration ceremony of the 'Make In India' week in Mumbai, India, last year. Danish Siddiqui/Reuters
India's Prime Minister Narendra Modi speaks during the inauguration ceremony of the 'Make In India' week in Mumbai, India, last year. Danish Siddiqui/Reuters

India's move towards clearer and more open foreign direct investment (FDI) regulations is helping to drive greater inflows of funds into the country, according to analysts.

India has long been associated with cumbersome bureaucratic procedures and regulations that have deterred foreign investors.

“The certainty and clarity in the FDI policy will go a long way in building confidence for investors and significantly enhance the ease of doing business in India,” says Mehfuz Mollah, an economist at Economic Laws Practice, based in Mumbai.

India in August launched its latest consolidated foreign direct investment (FDI) policy report, which is aimed at making the regulations governing various sectors clear to potential investors. This singalled that the government had liberalised the FDI rules for several sectors, including defence, construction and broadcasting.

"The recent consolidated report on its FDI policy is an example of the government's aim to attract more investment," says Rahul Pillai, the chief executive of Interem Relocations, based in Dubai and with operations in India. "Today [the fact that] more than 60 per cent of the sectors are open through an automatic route without any government approval is a good example of minimum government and maximum governance."

Under Narendra Modi's government, which came to power in 2014, attracting foreign investment has been high on agenda. This is because such flows are vital as the country - with a population of more than 1.2 billion, a large number of whom remain in poverty - requires high levels of economic growth, job creation and infrastructure development.

Mr Modi has conducted a number of overseas trips in a bid to woo investors, including high-profile visits to the United States, UAE and Japan.

Initiatives include "Make in India", aimed at transforming the country into a global manufacturing hub, and scrapping the foreign investment promotion board during the budget this year, removing a layer of bureaucracy in gaining approvals for foreign investment.

"The Indian economy is going through a speedy reforms under the Modi government," says Mr Pillai. "It has taken large amount of initiatives to attract more and more FDIs to India. The government has opened up or increased the cap of many sectors to the world to [attract backers to] come and invest in the Indian growth story.”

However, not all the evidence suggests that India is doing as well as many say. The World Bank's ease of doing business rankings placed India at 130 out of 190 countries last year, up the listings by just one place on the year before. The government is said to have set itself the ambitious target of climbing to 90th place in the next survey, and to be in 30th place by 2020.

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A report by UBS Securities released last month forecasts that FDI is set to rise to 2.5 per cent of India's GDP over the next five years, compared with 1.9 per cent in the financial year to the end of March 2017.

Flows of FDI into India reached a record US$60 billion between April 2016 and March 2017, according to figures from the Indian government.

UBS highlights that the largest rise in FDI was in the telecoms sector in the last financial year at $4.2bn. Insurance was another sector that saw a steep increase in inflows, while electrical equipment, banking services, metals industries and broadcasting sectors were other areas that experienced growth in FDI levels. Manufacturing has seen a substantial boost in FDI, it says.

The online juggernaut Amazon, the Chinese smartphone manufacturer Vivo and the Japanese car maker Suzuki, are among those investing heavily in India.

"Post 2014 general elections, FDI inflows saw a compound annual growth rate of 11 per cent versus a dip of 6 per cent seen over the previous five years," according to UBS. It adds that India can continue to boost its ability to lure foreign investors if its “growth is accompanied with continuous structural reforms”.

But India has long been associated with having a difficult investment and business environment, despite its favourable demographics of a young, large population and strong economic growth.

The UAE's Etisalat, for example, got burnt a few years ago when it invested heavily in India and became unknowingly entangled in a $40bn telecoms corruption case, which resulted in the cancellation of 122 licences, forcing the company to exit the country.

There are sectors where limitations remain when it comes to FDI. Notably, overseas investment into multi-brand retail is capped at 51 per cent, which has dampened interest from foreign supermarket chains.

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Some analysts say that India's FDI policy has now reached a point of stability.

"The minimal changes in the FDI for 2017 marks the coming of age for the Indian economy,” says Mr Mollah.

"Frequent changes in FDI policies are a mark of an economy in transition. That stage has now largely been done in India."

Mr Modi has described India as “perhaps the most open country for FDI”.

In the recently released consolidated FDI policy, more favourable regulations for start-ups in India emerged.

"What I find particularly interesting is that, for perhaps the first time, the policy is relating to start-ups," says Srividya Kannan, the founder and director at Avaali, a consultancy based in Bangalore. "Allowing start-ups to raise funds through equity or equity linked instruments including issuance of convertible notes is great."

She adds that FDI is vital for India and can have a dramatic impact across various points of the economy.

"Foreign investors and investments is important for overhauling our infrastructure sector and to boost growth. This is also important to strengthen the rupee against other currencies and is very welcome."

Roma Priya, the legal advisor and founder of Burgeon, a legal advisory firm, says that India has certainly moved towards a more favourable FDI environment.

“This would have a positive impact as the increased foreign direct investment in India

would lead to overall betterment of economy,” she says. “The new consolidated policy comprises of provisions specific to start-ups, a sector that is encouraged by the government and is on top of their agenda.”

Changes to the FDI policy made over the past year have “encouraged fund-raising by Indian entities”, says Ms Priya.

“Foreign investments will help improve the country’s balance of payments.”

And she expects this positive trend to continue.