It does little good for a country to hold on to trade barriers if it is to survive in today’s competitive global economy

FDI bonanza Modi govt displays take-charge attitude delivers on reform promisePTI
news Economy Monday, June 20, 2016 - 20:16

With the BJP government having celebrated its second anniversary in power at the centre, much has been said about the pace of reforms, and a lack of political will in taking tough decisions. In what is a massive overhaul of the FDI regime in India, the government today took the decision to permit 100% Foreign Direct Investment (FDI) for ‘almost every sector.’ The decision will likely bring some cheers from those who have been critical of the government for not bringing in ‘big-bang’ reforms. 

The decision opens up pharmaceuticals, aviation and defence, among other sectors, to FDI. Worth noting is the fact that most of these would be under automatic approval route, which means that the foreign companies would not need prior approval for investment either by the Government or the Reserve Bank of India. The rest, comprising a small list, would go through the government route. With these changes, according to the official press release, ‘India is now the most open economy in the world for FDI.’

One can’t help but contrast this with what transpired under the UPA regime, when there was a massive hue and cry about bringing in FDI in multi-brand retail trade (MBRT). The backlash that the Congress government faced then is in stark contrast to the ease with which the FDI regime was liberalised today. Curiously, the BJP was at the forefront then in opposing FDI in MBRT, but it reversed its stance later, due to changing ‘economic realities’. And the most vivid display of that change of heart could be seen today.

It is of course, a welcome move. Investment and capital in any sector is good for the economy. It doesn’t matter very much whether that investment comes from within or outside the borders. It is capital that allows for absorbing more labour and creating jobs, and increasing productivity and wages.

If one looks at world economic history, FDI is a relatively recent phenomenon. The British economist David Ricardo had, in 1817, had taken for granted that capital could be invested only within the borders, and that capitalists wouldn’t invest abroad. Ricardo would have been amazed at the level of interconnectedness that is at work in the world economy today.

Trade barriers have, for the most part, been continually breaking down between most countries in the last century, and it does little good for a national economy to hold on to them if it is to survive in today’s competitive global economy. Indeed, the Austrian economist Ludwig Von Mises called the development of Foreign Direct Investment the “greatest event in the history of the 19th century.”

We’ve already begun to see the fruits of easing and simplifying FDI norms. In the last two years, the government brought in major policy reforms in a host of sectors— from tea and coffee to insurance, manufacturing and even defence. As a result, the country observed the highest FDI inflow of US$ 55.46 billion in the financial year 2015-16, nearly a 50% increase from what it had been just two years prior. The decision today will only build on that progress.

When one looks at today’s development, and the fact that there is steady progress being made in improving India’s ranking in the World Bank’s ‘Ease of Doing Business’ index, it gives the definite impression of a government that has taken charge – one that doesn’t shy away from making concrete changes. If the government stays on course, India’s economic landscape will likely change in the next few years. The Modi government can get much good done in the three years left in its term.

The decision today comes in the wake of Raghuram Rajan announcing his decision to step down as the Governor of RBI—a decision that has been scrutinised by commentators of all persuasions, with many suggesting that his decision was motivated to a fair degree by a lack of support from the present government. Apart from speculation, little can be said on what made Rajan take this call.

But it can be contended that Rajan enjoyed a fair deal of autonomy, and that the government let him have the final say in deciding the monetary policy of the country. He leaves, by his own admission, on a high-note, with the RBI achieving all that it set out to do when he took charge in 2013—controlling inflation and creating ‘a platform for macroeconomic and institutional stability.’ The slew of reforms that are being implemented only builds on the base that Rajan built in his 3 short years in office. 

(Ujwal Batra works with the Centre for Civil Society, New Delhi)

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