The NDA government at the Centre unveiled a second wave of reforms in Foreign Direct Investment (FDI) earlier this week, in less than a year since it had announced the first tranche of FDI reforms. Under the new policy tweak, the government eased rules governing FDI inflows into nine sectors, including aviation, defence, food processing, pharmaceuticals, retail and broadcasting.
However, the timing of the FDI rejig has a clear pattern to it. Immediately after the political dressing-down in Bihar, the BJP-led NDA government had thought it prudent to declare easing of FDI norms. Then it had left none in doubt that the move was a ploy to deflect the public gaze from the humiliating political rout in Bihar. This time around, the FDI balloon was flown just after the nationwide backlash triggered by the sudden announcement of exit by RBI Governor Raghuram Rajan.
The RBI Governor, at the receiving end of a vicious attack from a section of the BJP’s central leadership, perceptibly with the consent of the BJP brass including the Prime Minister, silenced his critics by volunteering to opt out of his job in the central bank. The second FDI announcement was timed to deflect public glare from Rexit.
Having said that, efforts of the Modi government to make the most of the stage-managed FDI bonhomie is more of optics than anything else. Widening FDI door by itself is not the panacea for the nation’s economic ills. Opening the door does not necessarily mean guests will come in droves on their own. In the past too, it did not happen. FDI doors had been opened but investments did not flow in in the desired manner.
The new measures are expected to pave the way to attracting more foreign investment since they target sectors which have been relative laggards only so far FDI is concerned. However, the nine sectors for which FDI norms have been eased account for just 11 per cent of the total foreign direct investment received by India.
If we compare this with the top five sectors namely services, construction, computer software and hardware, telecom and automobiles, together they account for a 45 per cent of the FDI pie. Therefore, easing of norms for these sectors may have made better sense in terms of FDI inflow to the country.
The refrain that India has achieved the highest growth in the world has not translated itself into creation of jobs. Unemployment has been steadily rising. Earlier this week, reports came in that nearly a thousand graduates and a sizeable number of MPhil degree holders in Maharashtra have applied for ‘hammal’ jobs for which the highest qualification sought was Class IV pass. This speaks volumes about the level of frustration among the nation’s youth with this government.
Opening the door to investments is just the first measure or an incremental step. It is independent of other things and cannot be a game-changer. It is more a statement of intent, an invitation for investors and companies around the world, to believe in the India story. To truly achieve its aim of opening up to increase employment and create jobs for the millions streaming into the labour force every year, the government will have to do more.
India continues to enjoy a lowly rank in the ease of doing business list among its peers. Retaining the investments that come in as a result of these measures will be the key challenge. This is not to downplay the government’s efforts to create an enabling policy universe in the country. FDI is a long haul issue.
There are equally significant and even more important things that the government should look at. Labour reforms, GST, boosting agriculture infrastructure in the country and ensuring a healthy banking system are other focus areas that can yield more.