The FDI cliff

This winter session of Parliament will see many variations on the theme of foreign direct investment. Right after the vote on FDI in retail, Parliament is expected to debate foreign investment in the pension sector, the insurance sector and the banking sector. To call it a foreign investment cliff would not be an overstatement. And this is without even counting matters like hiking foreign investment in defence production. The chief reason for this overload is that the executive and the legislature have not been able to see eye-to-eye on such crucial legislation for years. The damage, as Ratan Tata has pointed out in his interview to this paper, makes investment retreat to more hospitable territories.

The theme of all the measures pending in Parliament is broadly the same — the sectors have the potential to attract investments, but political anxieties about allowing investment from abroad have stymied it. This obstruction has only helped entrenched interest groups to prosper. It also becomes impossible to develop an investment climate that can be sustained only from within the country. But these issues did not come up during the debate on FDI in retail, and are unlikely to be dissected in the discussions over the forthcoming bills. An IMF data series on global coordinated direct investment shows, for instance, that foreigners accounted for $201 billion of enterprise money in the Indian economy at the end of 2011. At the same time, Indian investment in the rest of the world is nearly $63 billion. These numbers show the extent to which the domestic economy is integrated with the world. Trying to keep retail or insurance out of these mutual flows will not be possible.

For over a decade, the Indian economy has held back, not allowing foreign capital beyond the manufacturing sector. With the exception of defence, the current clutch of bills relate to the services sector that has led India's growth story. To expect foreign capital to invest, instead, in the manufacturing sector, one that we have nearly strangled ourselves, is rather unrealistic.

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