Recently, UNCTAD put India as the third most attractive destination in the world for FDI. Having wasted vital years following Licence Raj, India has finally undone the concept of foreign and welcomed FDI. The net FDI inflows into India have taken a huge leap since the early 2000s. From being virtually non-existent up to the year 2000 to reaching a massive $42 billion in 2008, we have surely come a long way. India has been ranked amongst the top 3 most attractive destinations for international investors by the World Investment Prospects Survey 2009-2011. The government deserves a pat on its back for achieving this in such a short span of time.
However, the picture isnt as rosy as it seems. Lets examine the case of the controversial yet critical defence sector. We are one of the top 10 spenders on military purchases. Of this, we manufacture only 30% of the equipment, the rest 70% is imported. The government regulates FDI in this sector by keeping an upper cap of 26%; so as not to increase our dependence on foreign capital in this strategically important sector. But due to lack of transparency, what may appear to be a strictly managed system is actually replete with loopholes that have been exploited well by investors.
Of the equipment that we manufacture, critical sub-systems have to be imported. But instead of supplying what we require, the foreign companies dump on us what they need to sell, thereby increasing our dependence on imports.
And finally to increase transparency, the government could impose conditions requiring successful bidders to set up system integration facilities with a certain minimum percentage of value addition in India. Now, its up to us to decide whether to fiercely guard this hidden treasure or to harvest it to its full potential.
Indian policymakers should, therefore, ensure that their policies are transparent to potential foreign investors, seek support from international approaches and practice good governance.
The author is a PGPM 2010-12 student at MDI, Gurgaon