India is a booming $1700bn economy that has integrated with the global economy and attracted $212bn of FDI since 2000. It is the world’s second fastest growing economy, with growth in gross domestic product averaging 8.6% per year over the past six years.

But India’s expansion had shrunken to to 7.7% per year in the period from April to June this year. And the prime minister’s Economic Advisory Council has strongly urged the government to take “active measures to improve the investment climate”. The council has claimed that uncertainty arising from various political developments has led to a slowing down of initiatives in India to restore investor confidence.

The country is believed to require a huge $500bn in FDI over the next 10 years to build the infrastructure that would underpin its potential rapid growth trajectory. But against this annual requirement of $50bn, inflows have been declining: to $23.4bn in 2010-11, compared with $33.1bn in 2009-10 and $35bn in 2008-09, according to official estimates.

The UN Conference on Trade and Development World Investment Report also indicates falling FDI inflows on a calendar year basis to $24.6bn in 2010 from $35.6bn in 2009 and $42.5bn in 2008.

Policy concerns

Why have FDI inflows to India slowed of late? One reason is delays in the approval of big-ticket investment proposals. Another is that the pursuit of ‘environmentally sensitive’ policies in denying forest clearances for projects in steel manufacturing and mining have considerably dampened investor sentiment. There have also been procedural delays in land acquisition. Foreign investors have also been concerned by the taxation policies in India, especially in cases of offshore mergers and acquisitions (M&As).

Consider, for instance, the fate of the largest big-ticket FDI deal from South Korea-based steel producer Posco, to build a 12 million-ton steel plant in Jagatsinghpur district near the port town of Paradip in the state of Orissa. It took six years after a memorandum of understanding (MOU) was signed between the state government and Posco-India for the project to be approved in May this year. But a protest movement has further stalled the acquisition of the land, and the MOU has lapsed after its five-year time limit. It has not yet been renewed.

Is it in the national interest that such a deal, with considerable economic, technological and strategic significance, exists only on paper? To be sure, there are issues to be resolved at the state government level on handing more than one-third of its iron ore supplies to the steel project. There are laws on the environment and forests that must also be implemented. But if a fast-growing economy requires large stocks of steel, there is no escape from investing in additional capacities. 

For similar reasons, Indian steel magnate Lakshmi Niwas Mittal has not been able to expand in India either. Mr Mittal predicts that the country is set to face a huge shortfall in supply of as much as 33 million tonnes of steel by 2020. But he, too, has faced a lot of opposition, forcing him to scale down his initial plans to set up a 12 million-ton plant to smaller 3 million-ton to 4 million-ton plants. Land acquisition has proved to be the deal breaker, even in this case.

Business deterrent

Similarly, UK mobile phone giant Vodafone, which entered India four years ago, has not found it easy to operate in the country, despite becoming its third largest mobile phone operator. Vodafone has recently been slapped with a tax bill estimated at $2.5bn that it is contesting in India’s Supreme Court.

According to Vodafone, no such tax was due when it acquired a controlling stake for $11.1bn to enter the Indian telecoms market. It bought a 67% holding from a Cayman Islands company owned by Hutchison Whampoa and the transaction entailed a sale to Vodafone’s holding company based in the Netherlands. As neither company involved in the deal was Indian, Vodafone argues that Indian taxation laws should not apply.

“We like India, it is an important part of Vodafone, but we need to be reassured that it is a business-friendly environment,” said chief executive Vittorio Colao in and interview with the New York Times.

Energy giant Cairn Energy also experienced considerable uncertainty in India when it wanted to offload its stake to the London-listed Vedanta Resources. The Indian government finally approved the takeover of its assets in the country nearly 11 months after the two companies first announced their plans for the $9.6bn deal – but only after adding a series of stiff conditions. The repeated delays in clearing this seemingly straightforward transaction further dented India’s reputation for FDI in the oil and gas sector.

A long way to go

The upshot of events such as these is that investors lose confidence, and as a result India’s growth prospects are impacted. Although FDI inflows have begun to pick up during April to June 2011, it needs more investment to build roads, ports and airports. Pressure is mounting on the country's government to create an environment to further accelerate FDI inflows.

While India’s policy regime has become progressively liberal, there is still some distance to cover in streamlining procedures, such as removing sectoral caps in insurance, retail trade and the financial sector. The proposal being mooted to allow FDI in multibrand retailing would certainly be a timely boost.

More FDI will not flow in unless the hassle component of India’s regulatory apparatus is reduced. The country must compete aggressively to attract more FDI to restore the lustre to its growth story.

N Chandra Mohan is an economics and business commentator based in New Delhi