India’s finance minister, P Chidambaram, recently visited the US and Canada to sell India's story and attract more investment. His promotional tour also took in Japan, Hong Kong, Singapore and London.

There is a sense of urgency in India’s need to attract more stable capital inflows, such as FDI. The country’s infrastructure and imbalance of trade in goods and services touched a record level of $32.5bn, or 6.7% of GDP, between October and December 2012, according to the Reserve Bank of India.


Liberalising FDI caps

On his tour, Mr Chidambaram indicated that the Indian government is considering liberalising the caps on FDI for various sectors of the economy. These include raising the cap on telecoms from 74% currently to 100%, and defence from 26% to 49%.

“We should look at each FDI cap. If the cap is serving a purpose, we should continue with the cap. If the cap is no longer serving the purpose, then we should either relax or remove the cap. The FDI caps were laid down historically at different points of time… These caps must be looked into again,” said Mr Chidambaram.

India's government has expressed frustration that foreign investors have not rushed into the multi-brand retail or aviation sectors – whose FDI caps were raised in September 2012 to 51% and 49%, respectively. According to the minister for consumer affairs, food and public distribution, “no proposal has been received for FDI in multi-brand retail”.

Aviation success

However, Malaysian low-cost carrier AirAsia has tied up with India’s largest conglomerate, Tata Sons, for a joint venture, AirAsia India. But there is resistance from India's civil aviation minister to the deal itself, who keeps citing procedural problems.

The Middle Eastern carrier Etihad has taken a 24% stake in Jet Airways, India’s second largest airline, but there are uncertainties around the deal. It seems Etihad wants clarification from the government that it should not suffer as sister company Etilisalat did when its telecoms licences were cancelled by India’s Supreme Court. The government accordingly is fast-tracking a bilateral investment protection agreement with the United Arab Emirates.

Meanwhile, there is no respite for the hapless Vodafone, which has so far invested $15bn in India since 2007, as it is confronted by another deal-breaking condition from the government to rebid for its lapsed telecoms licences rather than have them renewed automatically. Its $2.5bn tax liability also has not been resolved pending amendments to the Income Tax Act. The upshot is that FDI is badly needed but the environment is still not favourable to attracting such inflows.

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