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Making India an Attractive Investment Destination: Analyzing FDI Policy and Challenges

Pravakar Sahoo


EXECUTIVE SUMMARY

This paper outlines India’s foreign direct investment (FDI) policies and highlights challenges for foreign investors, recent policy developments, and the potential for foreign firms.

Main Argument

The Indian economy requires FDI to fill the gap between domestic savings and investment and to boost productivity- and investment-led growth. Although Indian FDI policy has been progressive, inflows have been far lower than expected and lag behind those of competitors like China. Low levels of investment and trade, combined with decelerating growth, have been causes for concern in India. Manufacturing growth, which is essential for job creation, has been sluggish due to flip-flops in government policymaking, a lack of policy reforms, and an unfavorable investment climate in recent years. Some of the factors that affect FDI inflow to India are inadequate infrastructure, inflexible labor markets, difficult land-acquisition procedures, lack of progressive FDI reforms, and lack of center-state coordination. However, the government led by Prime Minister Narendra Modi has undertaken a number of initiatives to restore investor confidence, and several other positive reform measures are expected to be implemented before the 2015–16 budget.

Policy Implications

  • Increasing the availability of quality infrastructure is critical to attracting FDI, yet a number of legal and bureaucratic factors may limit future developments. To create a healthy environment for infrastructure development, the Modi administration needs to establish an appropriate institutional framework that incorporates a dispute resolution mechanism, independent regulatory authority, and a special investment law and tariff policy.
  • Although the national government is aiming to encourage economic experimentation, special economic zones (SEZ) in India have not been successful. The government needs to rethink the size of SEZs, which are currently relatively small, and provide SEZs sufficient transportation infrastructure to connect to markets. Before approving SEZs, there is also a need to ensure that utilities such as land, water, and power are available.
  • Bureaucratic obstruction is one of the major reasons for the slow realization of FDI relative to approvals. Useful steps would be to encourage every state to have a single nodal agency for approval and clearances, and to improve coordination between the central government and state-level nodal agencies.

Pravakar Sahoo is an Associate Professor in the Institute of Economic Growth at the University of Delhi.


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