No Left turn, straight bat on FDI helped

Updated: Feb 29 2008, 05:52am hrs
Despite stiff opposition from the Left parties, the government seems to be inviting foreign investments with open arms.

If the Economic Survey is to be taken as an indication, the government is toying with the idea of allowing 100% foreign equity in branded specialised retail companies, while advocating a liberal foreign investment regime in insurance and banking services sectors.

If the move comes along, global retail giants such as Wal-Mart, GAP & Target can open outlets in the country. Current policy bars any investment in retail that sells multiple brands and products.

There have been several violent incidents across states against outlets by Indian retail majors such as Reliance and Subhiksha, as small retail traders fear that big players take away all their customers.

On the issue of opening up the insurance sector, the Survey has suggested raising foreign equity share to 49%. At present, foreign equity stake in the insurance companies is capped at 26%. Foreign joint venture partners have consistently been asking for raising the ceiling. It also suggested allowing 51% foreign equity in a special category of insurance companies that provide all types of insurance like health, weather to rural residents and agricultural activities.

The survey advocates 100% foreign participation in greenfield private rural agricultural banks. It also proposes take over or buy out of other private sector banks. "Such banks would be free to set up any number of branches in any rural or semi-rural area and they would be free to lend to agriculture and allied sectors like agro-processing and agro-input industries," the Survey has said.

This is significant as Reserve Bank of India has recently observed that the performance of public sector banks in rural and agricultural lending have been inadequate while that of most of the private and foreign banks is even lower. The survey also suggests allowing expansion of these rural banks into small towns after the general FDI policy on banks is announced.

According to the Survey, FDI inflows into the country accelerated during 2006-07 due to reforms in policies, better infrastructure and a growing financial sector. FDI inflows after rising to a level of $ 6.2 billion during 2001-02, has gone up to $ 23 billion in 2006-07.

The trend continued in the current financial year with gross FDI inflows of $11.2 billion in the first six months. The inflows continued to be preponderantly in the sectors such as equity, broad- based and spread across a range of economic activities like financial services, manufacturing, banking services, information technology services and construction.

However, manufacturing sector seems to be a major worry area for the government. The sector, which grew at 12% in 2006-7 grew just 9% in 2007-8. This has impacted the slowdown in the growth of the industrial sector.

If the government follows a liberalised foreign investment regime, one of the sectors to benefit big time would be manufacturing, as the companies will be able to raise funds easily.

According to the economic survey, the manufacturing sector is expected grow by only 9.8% during the current fiscal. The slower growth of consumer durables is attributed to the decline in growth rate.

During the year capital goods have grown from 17.4% during 2006-7 to 20.8%, which is significant for the required industrial capacity addition.