India introduced financial reforms way back in 1991 with the primary aim of solving the balance of payment crisis. Though the reforms were revolutionary in nature but at the same time the government was hesitant in opening up all the sectors for foreign investors keeping the protest from various sections of the country in mind. As a result these reforms were half hearted and the government relied primarily on the domestic sources for getting out of the crisis.
After 2 decades of the reforms the scene is now changing. A major section of Indian economy is now open for the foreign investors. At the same time there are many sectors where the permissible % of foreign investment is way below the sufficient level. Prominent among these sectors are insurance, retail, private sector banking and defence. Retail which constitutes about 35 % of Indian gdp has the 51% cap for investment in single brand outlet. Similarly in insurance, defence and private sector banking the fdi limit is 26%, 26 % and 49 % respectively.
Obviously, these restrictions have an adverse impact on the level of investments in our country. If we compare India with other developing countries India is way behind them in attracting foreign investment. Last year when the China got the fdi of $90 billion, for India the figure was only $ 30 billion.
According to Anand Sharma, the commerce minister of India, the country aims to attract $ 50 billion of foreign direct investment up to 2012. This ambitious aim can only be realized if India opens the sector like retail, insurance and private banking for foreign investors.
Earlier this year in Indo US CEO forum in Washington, the finance minister told that the government is planning to increase the investment cap in insurance sector from 26 % to 49 %. This is a welcome step .A higher foreign direct investment (FDI) will unshackle the insurance industry and drive growth and long-term development, enrich the business by bringing world-class business practices and processes, expand distribution capabilities and deepen market penetration.
Similarly the retail sector also has a huge potential in terms of investment .Its potential benefits other than funds are improvement in supply chain, skill development, opportunity for greater sourcing from India, and productivity improvement and growth in market size etc.
These and many other sectors such as private sector banking, defence and civil aviation are in want of huge investment which is only possible by opening the doors for foreign players. These investors will bring not only money with them but will also result in employment generation and skill improvement. Apart from this, it will also results in much needed sophisticated technology, knowledge transfer, linkages and spill over to domestic firms.
In order to maintain and bolster the present rate of growth it is necessary for the government to raise the investment cap in the sectors where permissible level investment is low. This will have a trickledown effect on the other sections of economy and will result in higher rate of growth.
Jayant Yadav
MBA(IB) 2010-12
jayantyad@gmail.com* This article was published in the Financial Express
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