Frequent reversals in the FDI policy send out negative signals to potential investors

The issue of transparency in economic and business policies is one of the most talked about topics among businessmen and….

The issue of transparency in economic and business policies is one of the most talked about topics among businessmen and policy makers. Non-transparency is a term given to a set of government policies that increases the risk and uncertainty faced by foreign investors in doing business in any country.

According to a report by World Trade Organisation, issued in August, 2009, the degree of non-transparency is an important factor in attracting foreign investors. The statistical study reveals that on an average a country could expect 40% increase in FDI from a one-point increase in their transparency ranking. And an increase in investment translates into more resources, which in turn increases social welfare and economic efficiency.

In economic literature, the discussion about transparency has mostly focused on two key aspects?corruption and bribery, and on protection of property rights. But in practical terms, the lack of transparency has five different aspects. First, when economic policy is subject to corruption and bribery. Second is in the area of property rights and their protection within a given country. Third relates to bureaucratic inefficiency, fourth relates to poor enforcement of law and fifth relates to sudden reversals in economic policies.

As the largest democracy with the second largest population in the world and with a highly educated, English speaking work force, India should have been an attractive proposition for foreign investors. Yet, India seems to be suffering from a host of transparency problems, major amongst them being the issue of poor enforcement of law and frequent policy reversals, which happens at the whim of political masters and/or bureaucrats.

For example, in the Internet Service Provider (ISP) space, India had previously allowed 100% FDI but subsequently, in 2007, this was reduced to 74% at the insistence of the Telecom Regulatory Authority of India (Trai). Also till date no grace period has been defined by Trai for foreign companies to comply with new ownership rules thereby creating uncertainties in their minds.

Similarly, Overseas Direct Investment (ODI) has received a fillip from 1995 and currently companies and registered partnerships are allowed to invest up to 400% of their net worth without any prior approval from the government. However, this freedom is not enjoyed by trusts or societies which still require prior approval by the Reserve Bank of India.

Furthermore, ECB guidelines restrict Indian companies to raise more than 400% of their net worth in the world market. Another issue is that many construction projects are offered only on non-convertible rupee payment basis unless it is a government project financed by any international development agency. Also, in sectors where licensing is required, procedures did not discriminate against foreign investors. But in some consumer goods industries local content requirements are imposed on them.

These reversals in the FDI policy norms send out negative signals to potential investors. India is a country with enormous potential for development. It should now wake up and start noticing the preferences of the foreign investors. It needs to cure the disease of non-transparency by bringing in new reforms. If it fails to do so, the opportunities will not come dressed in overalls again.

The writer is student of Post Graduate Diploma in Marketing Management, Xavier Institute of Social Service, Ranchi, batch of 2009-11. Email:

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First published on: 15-03-2010 at 00:54 IST