Atmanirbharta through FDI

February 22, 2021 5:23 AM

Achieving competitiveness has to be the country’s central goal as a whole

The government’s initiatives to reduce the regulatory burden on businesses will also play an important role in making India cost-competitive.The government’s initiatives to reduce the regulatory burden on businesses will also play an important role in making India cost-competitive.

By Ramesh Abhishek

Finance minister Nirmala Sitharaman announced several initiatives that will help facilitate the integration of Atmanirbhar Bharat with the global economy. The government is going all out to promote investments, including FDI, to strengthen the economy, and has continued the FDI reforms initiated after 2014. These reforms, both substantive and procedural, combined with the focus on improving ease of doing business and robust investment promotion ensured record FDI inflows of $358 billion between 2014 and 2020 (53% of the FDI reported in the last 20 years).

In 2015, the government hiked FDI in insurance from 26% to 49%. Today, life insurance penetration in the country is 3.6% of GDP, way below the global average of 7.13%; for general insurance, it is even less at 0.94% of GDP, as against the world average of 2.88%. But the general insurance sector is growing at a robust pace of 18% annually. Covid-19 has also led more people to purchase health insurance policies. The average increase in health insurance alone is currently at 35-40%. Covid-19 has shown that further penetration of insurance in India is needed and significant capital infusion required. Now, the government has announced increase in FDI limit from 49% to 74% in insurance. This will help insurance firms raise funds to ensure they meet their growing business requirements. The other impact would be helping digital insurance companies to enhance their penetration in the market.

The government can consider more steps. As is known, businesses need clarity, predictability and time-bound decision-making to make investment decisions. This is more important for foreign investors. One such area has been the need for clarity on a few issues relating to Press Note 3 to prevent ‘opportunistic take-overs’ from investors of countries sharing a land border with India. The Press Note language had a few consequences, some of which may not have been intended by the government. For example, the term ‘significant beneficial owner’ was not defined, leading to lack of clarity. It has also adversely affected the operations of many Indian companies who have investments from before from such a country. Even if such companies want to invest in their wholly-owned subsidiaries from their own resources without an infusion of equity from outside India, they cannot do so without prior approval, which by its nature takes time. Also, many western countries’ citizens become residents of ‘tax havens’ like Hong Kong for tax purposes. But they and entities controlled by them also get covered by the Press Note.

Similarly, NRI investments on a non-repatriable basis were treated at par with domestic investment due to a significant reform done by the government in 2015. However, a few consequential changes need to be done in FDI policy and FEMA regulations to realise this important reform’s full benefits.

India also saw significant FDI inflows in the organised retail and e-commerce sector. This has yielded major benefits to MSMEs, consumers and others in the chain directly and indirectly. Time has perhaps come for a major policy haul in this area to support better marketing of made-in-India products both farm and non-farm, through promoting even larger investments in infrastructure, skilling, and bringing more and more small businesses into the digital world.

The government’s initiatives to reduce the regulatory burden on businesses will also play an important role in making India cost-competitive. It is time to think of conducting Regulatory Impact Assessment of every proposed law and regulation to see how these affect the cost of doing business.

India’s achievements in promoting ease of doing business have earned accolades, and it’s time to prepare a National Ease of Doing Business Policy that will bring about a sea change in mindset and attitudes. This should be, of course, part of a broader focus on improving the competitiveness of Indian businesses to which governments at all levels, regulators and all organs of government should be fully committed. All efforts to support our businesses through higher tariffs and subsidies can only be for a limited period, while achieving competitiveness has to be the country’s central goal as a whole.

The author is former secretary to Government of India, DPIIT, and currently advisor to Primus Partners Pvt Ltd

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