Measuring India’s reform agenda for foreign investment

The reformist measures related to raising of investment limits in sectors like broadcasting, insurance, retail, railway infrastructure etc

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Is India an active reformer to welcome foreign capital? One measure often quoted to analyse India’s behaviour is quantitative inflow trends as a benchmark to test the index of reform activity. If this be the only measure, then is it not likely to be misleading or at least inadequate? Judging India’s performance also requires measuring comparative behaviours of other capital-seeking nations.

The report on G20 investment measures taken between April 2009 and mid October 2015—prepared by The Organisation for Economic Co-operation and Development (OECD) and the United Nations Conference on Trade and Development (UNCTAD)—can offer an interesting insight. This document contains a compilation of all measures made available under the mandate of G20 leaders. For the limited purpose of the report, international investment refers to foreign direct investment with only those measures specific to FDI having been collated. Investment measures consist of any action that impose or remove differential treatment for foreign investors vis-à-vis domestic investors.

In this period of 78 months, there were 53 days on which either the Government of India or the Reserve Bank of India announced investment measures. Only on two occasions did the changes lack reformist behaviours. First when investment in the brownfield pharmaceutical industry was taken off the automatic list and placed for prior government consideration and second when the government prohibited future investments in manufacture of cigarettes and allied tobacco products. The reformist measures related to raising of investment limits in sectors like broadcasting, insurance, retail, railway infrastructure etc.

Comparatively, the activity witnessed in other emerging nations comprising the G20 is not as intense. For example, Brazil during these years, only engaged in three measures. It raised the limit of foreign participation in state-owned enterprises back to 20 percent, removed the cap on telecom networks and cable TV but reinstated restrictions on rural land ownership for foreigners. China was the only notable nation with nearly 24 instances where FDI measures were reported, which is the closest any nation arrives to the activity milestones in India. Several of the inflow-friendly measures happened in 2015 including opening of the ecommerce sector, allowing foreign participation in bank and card-clearing businesses and relaxing restrictions on real estate markets. Possibly, some of these measures were an outcome of the rather visible slowdown in the Chinese economy. The news from Russia was not welcoming to investors as most measures were restricting rather than encouraging investment.

The mature nations of Canada, France and Italy joined Russia and China in bringing measures to deal with the concerns on investment to national security. For example, China in July 2015 introduced the National Security Law that lays down general principles to establish a national security review and oversight mechanism to conduct review of foreign commercial investment. France, on the other hand, brought in a decree on foreign investment aspects to safeguard national interest in energy, water supply, transport and telecoms network and other assets of vital importance. The trend extended to several other nations.

Let’s place these comparative measures in context. Firstly, India moved cautiously but consistently across various political formations on opening the economy to foreign investment. It has shown comparatively high investment reform behaviour. Given the passage of time, as the policy makers gets comfortable and confident with prior measures, incremental measures typically follow, sometimes rapidly, often timidly.  Secondly, the sectors which India has been hesitant upon for a while, like defense, broadcasting and public transport, are also areas where both mature and emerging nations have placed frameworks to filter and evaluate foreign investment. In this regard, most nations are demonstrating similar behaviour.

Finally, is India’s reform agenda adequate and sufficiently bold? Well, this does not have to be measured comparatively but only in the context of India’s own needs and its aspirations for capital and growth. It is capable of doing much better for itself.

- By Gokul Chaudhri, Leader, Direct Tax, BMR & Associates LLP

The thoughts and opinions shared here are of the author.