Though there has been a major effort to reduce policy uncertainty, more needs to be done in the areas of technology, communications, mining and retail where India needs huge investments.
The Narendra Modi government is pulling out all the stops to attract foreign investment, sensing an opportunity presented by the US-China trade war. Though there is an apparent thaw in the relationship between the world’s largest economies, the wounds of the nasty exchanges are expected to linger for a long time. Technically speaking, India should have been the largest beneficiary of the trade war, but countries such as South Korea, Vietnam, Malaysia, Argentina and Chile seem to thrive in the conflict. The question is why India is failing to capitalise on the situation. The answer lies in the business environment in the country that leaves a lot to be desired for foreign investors, despite the best efforts by the Modi government. Two business leaders who are currently in India have summed up the situation for all foreign investors. JP Morgan CEO Jamie Dimon says India could grab a major share of global manufacturing if it unleashes reform measures to de-bottleneck key sectors such as real estate, infrastructure and labour. In a letter to Prime Minister Modi, Walmart CEO Doug McMillon has sought a stable and predictable business environment.
There is no denying that the Modi government has taken some solid steps towards improving the business environment that have helped India improve its standing in the World Bank’s ease of doing business ranking. The government is working overtime to make India an attractive investment destination, evident from the public pronouncement by its ministers. While addressing journalists in Washington DC on Saturday, finance minister Nirmala Sitharaman said she is preparing a blueprint for international companies looking beyond China. News reports on Sunday said the government is reviewing the FDI policy to further ease sectoral caps. Newspaper reports on Monday said the government will offer the services of a relationship manager to companies that bring in more than $500 million in FDI. So the government seems to be doing its bit to attract foreign investment.
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This brings us to the next question raised by the Walmart CEO. How important is a predictable policy environment for attracting investment and fostering economic growth? The government is attaching a lot of importance to policy certainty as evident from the fact that the finance ministry has devoted an entire chapter to the subject in the Economic Survey 2018-19. The chapter explains how economic policy uncertainty peaked in 2011-12 coinciding with the years of policy paralysis. It goes on to establish the correlation between the Economic Policy Uncertainty Index and foreign investment. It concludes that the Modi government managed to reduce policy uncertainty since 2015 against a global environment of increases in unpredictability. The chapter ends with three recommendations to reduce policy uncertainty. They are: (a) policymakers must ensure that policy actions are predictable by providing forward guidance and reducing arbitrariness in implementation, (b) policymakers must monitor economic policy uncertainty index. The government must encourage creation of sub-indices to capture policy uncertainty in areas such as fiscal policy, tax policy, monetary policy, trade policy and banking policy, and (c) quality assurance of processes in policymaking is critical. Government departments must be mandated to seek quality certifications to reduce uncertainty at policy implementation level.
Though there has been an effort by the government to reduce policy uncertainty, more needs to be done in the areas of technology, communications, mining and retail where India needs huge investments. The US-China trade war presents a great opportunity to the country to become a global economic powerhouse. To this end, the government should speed up its efforts to remove policy bottlenecks. Most of its efforts should go into removing policy uncertainties that impede FDI inflows.