FDI and the ordinary Indian

Source: The post is based on an article “FDI and the ordinary Indian” published in Business Standard on 13^th October 2022.

Syllabus: GS 3 – Economic Development

News: There have been views that India is one of the world’s fastest-growing economies. However, India has not been able to attract Foreign Direct Investment (FDI) as it should have been.

Does the improvement of rank in EoDB increases FDI?

India has improved in the rankings of Ease of Doing Business (EoDB) from 142 in 2014 to 63 in 2020 but there has been a high unemployment rate.

The improvement in EoDB rankings has also not resulted in more the Foreign Direct Investments (FDI) inflows.

The FDI in India has seen a dip in 2021 and the dismal condition of SMEs have also been unable to attract FDIs.

Whereas, China ranked second in terms of FDI despite an EoDB ranking of 31 in 2019 whereas India ranked 63 in EoDB but it ranked seventh in FDI.

What is the importance of SMEs and what are the issues they are facing?

Majority of the parameters of the EoDB represents the views of larger corporations. However, investor might look for the ease of business most of the Small and Medium Businesses (SMEs) having in a country. However, SMEs are not getting the similar environment, as big corporations are getting.

SMEs face many issues such as getting permits, licenses, and the high cost of electricity. The owners of SMEs have to rely on local contacts to sort issues related to permits and licenses.

The license-permit regimes are relatively less oppressive in the IT sector compared to SMEs.

The ranking of India in EoDB was improved with the improvements in resolving insolvency rankings with the introduction of the Insolvency and Bankruptcy Code. However, it is meaningless for SMEs because they lack the ability to access the Insolvency and Bankruptcy Code processes.

Moreover, the current government has come up with Production-Linked Incentive scheme (PLI) to improve the Indian business environment and attract foreign investment.

However, there is a doubt on the efficiency of the scheme as it is new.

What are the problems with the present policies to attract FDI?

The backward-area investment incentive does not work. It proves that the business environment cannot be improved by compensatory policies. Companies start to leave as soon as the sunset clauses come to an end.

Import substitution which is also present in the PLI schemes has proved to be a failure in the seventies and eighties.

Incentives are needed for a long term as India will have to constantly compete with rivals (Vietnam and Indonesia) in the global investment race.

Therefore, government should work with its ordinary people like the small-scale entrepreneur in order to attract FDI.