India’s journey towards becoming a global economic powerhouse hinges on several factors. One is the ease of doing business. While India had improved its ranking in the chart published by the World Bank’s Doing Business report, it also slipped on some key parameters before the multilateral institution discontinued this annual assessment in 2021 on allegations of discrepancies and rank manipulation.
Conceptually, however, to foster economic growth, making it easier to do business in India is important. Foreign Direct Investment (FDI) also plays a crucial role in this by acting as a catalyst for growth, innovation and job creation. However, restrictive FDI policies in key sectors are hampering the pace of India’s economic advancement. Addressing these challenges is imperative for the country to unlock the full potential of its economy.
FDI is a key driver of growth and socially beneficial outcomes: FDI is more than just an influx of capital; it brings with it technology, expertise and global best practices that are vital for the growth of various industries. Moreover, it creates jobs, boosts exports and enhances the overall competitiveness of the economy. Countries that have embraced FDI have witnessed significant economic transformations, and India should be no different.
In the insurance sector, the Indian government maintains restrictions on foreign investment that limit the ability of foreign companies to fully participate in the market. While the intention behind an equity limit of 74% (raised from 49% in 2021) on foreign participation in this sector may be to protect domestic insurers, it also leads to a lower level of competition and innovation.
The cap implies foreign players cannot fully control Indian units, so it also holds back the capital and expertise they infuse. This ultimately translates into fewer choices for consumers and can result in higher premiums, as local insurers may not feel any pressure to offer competitive risk coverage or diversify their product offerings. A lighter GST rate could lower premiums, but we would need more competition for this sector to evolve in a direction that better serves Indian needs.
On another note, the media and digital media sectors in India continue to face significant FDI restrictions. This limits the entry of international media companies and reduces content diversity. While Press Note 4 allowed up to 26% FDI in digital platforms for news and current affairs, ambiguities remain around the definition of “digital media” and the scope of entities affected; does it apply to social media platforms and search engines, for example?
Moreover, the lack of any distinction between content uploaded from India and abroad adds to the regulatory challenges faced by global players operating in the country. Easing FDI restrictions in this sector could drive innovation, improve production quality and foster global partnerships.
This would help diversify content and perspectives, as also enhance the technological capabilities of local media houses. By addressing these gaps, India can attract more investment, boost job creation and strengthen its position in the global digital media ecosystem.
The e-commerce and retailing ecosystem has FDI norms that are among India’s most complex. These need simplification.
This broad sector contends with four different FDI regimes: for inventory-based online operations, in which FDI is not permitted; for online marketplaces, in which 100% automatic-route FDI is allowed; for single-brand retail trading, in which FDI up to 100% is permitted without the need of government approval on the condition, among others, that 30% of the value of goods sold has to be sourced locally from small units if FDI exceeds 51%; and for multi-brand retail trading, in which 51% FDI is permitted (upon approval), subject to similar local-sourcing and other conditions but engaging in e-commerce activity in this model is prohibited.
India must rationalize these norms to enhance the ease of doing business in this sector, especially for retail operations where complex sourcing rules tend to deter foreign investment.
While it is crucial to boost Indian industry and support local businesses, this should not be at the cost of limiting consumer choice and innovation. The aim should be to strike a balance that fosters a competitive environment without compromising the interests of citizens. While FDI curbs are often intended to protect domestic industries, their detrimental effects on our market outcomes should also be taken into account.
India needs bold FDI reforms: To make it easier to do business in India and achieve sustainable economic growth, we must adopt a bold set of reforms that include relaxing FDI restrictions in key sectors. The benefits of it would be manifold, ranging from greater job creation and technological advancement to enhanced productivity and improved global competitiveness.
As a country aspiring to become a $5 trillion economy in a few years, India cannot afford to let restrictive FDI policies hold it back. Embracing foreign investment is not just about opening up markets; it’s about positioning India as a leader in the global economy, capable of attracting the best talent, technology and capital from around the world.
A more welcoming environment for FDI will also help secure India’s place in global supply chains, ensuring that the fruits of growth are better shared across all segments of society.
The time for half-measures has passed; what India needs now is decisive action to unlock its full economic potential.
The author is member of Parliament, Lok Sabha
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