India needs FDI, but it is no silver bullet
The Centre’s decision to liberalise foreign direct investment rules on Wednesday as part of an ongoing effort to pep up the economy is a step in the right direction. The tweaking of rules to relax the local sourcing norms for single-brand retail will go a long way in easing the flow of credit into a vibrant sector. These changes will also hopefully help smoothen ties between Prime Minister Narendra Modi and US President Donald Trump in the backdrop of persistent complaints of India placing barriers to trade and investment from America.
The clarification that 100% FDI would be allowed into contract manufacturing was especially important to remove confusion and underline the fact that India is open to business. Already manufacturing giants like Foxconn, which makes Apple’s iPhones on contract, have entered the Indian market. Many more are likely to follow now that the rules are clearer. Opaque rules help no one except vested interests and corrupt elements.
The intriguing change came in coal mining where 100% FDI has been allowed. Many are seeing this as a precursor for game-changing makeovers. But to attract global majors and their latest technology to India’s moribund coal industry, there is a need for more reforms, including opening up the auction of coal mines on purely commercial lines and not as captive mines for power generators and steel plants.
No one can deny that India requires more FDI not only for the money it brings in but also for the global practices that come with it. If the country is to achieve its goal of pushing the GDP growth rate to 8-9% and above, it needs both incremental investments as well as access to the latest technology. However, FDI cannot be a silver bullet to India’s investment problems.
India’s gross savings rate has declined from nearly 36% in 2011 to a tad above 30% in 2018. Without a significant increase in its own savings and investments, no amount of FDI can help the nation grow to its real potential.