Thursday, November 17, 2005

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India decides to welcome FDI

Jo Johnson reports in the Financial Times that the Indian government is about to make some major changes in its rules about foreign direct investment:

India's Communist-backed government will on Thursday afternoon consider a sweeping liberalisation of foreign direct investment rules that would kick start a long-stalled programme of economic reforms.

Kamal Nath, India's minister for commerce and industry, has proposed allowing 100 per cent foreign direct investment in a range of sectors, including airport construction, oil & gas infrastructure and cash & carry wholesale trading.

The cabinet will also debate whether to allow FDI in the exploration and mining of coal, lignite and diamonds, and in the cultivation of important plantation crops such as coffee, tea and rubber....

India attracted $5.5bn in FDI in 2004-5, an increase of 18 per cent, but less than a tenth of the inflows into China. The government estimates that $150bn needs to be invested in upgrading the country's infrastructure over the next 10 years.

If the new rules are approved, they will also allow foreign investment to come in by the so-called "automatic route", circumventing a cumbersome approvals process overseen by the Ministry of Finance's Foreign Investment Promotion Board....

The measures will disappoint the US and UK government, however, who have been lobbying aggressively for foreign direct investment thresholds to be allowed in the Indian retail sector and for the ownership ceiling to be raised in insurance. Mr Nath, in an interview on Tuesday, said he would be in a position to put a proposal to the cabinet permitting FDI in retail, allowing companies such as Wal-Mart and Tesco to enter into the $205bn Indian retail market, within three months.

UPDATE: Tim Harford has an update suggesting that FDI liberalization on't be preceding as planned.

posted by Dan on 11.17.05 at 10:49 AM


I'm going to point out the obvious: China, despite its capital controls and partnership requirements for foreign investors, has outdone India in FDI flows.

I'll pull a cop-out here before I stretch my luck. This action can go two ways. First, it might make India more attractive relative to China in that the local partnership requirements are waived. Still, it might also make foreign investors suspicious that India is offering more generous terms. They might think India is doing so due to a perception that it's a less attractive investment target. The principle of price conveying information in an economics or marketing sense is at work in the second possibility.

posted by: Emmanuel on 11.17.05 at 10:49 AM [permalink]

India's "Communist-backed government?"


posted by: Mike on 11.17.05 at 10:49 AM [permalink]

Seems the major changes will have to wait:

"India's Communist-backed government on Thursday night shied away from approving a sweeping liberalisation of foreign direct investment rules that would have kickstarted a stalled programme of economic reforms." Via the FT.

posted by: Pablo Halkyard on 11.17.05 at 10:49 AM [permalink]

the govt. of india is trying by hook or by crook to introduce fdi in retail at the behest of walmart and the u.s. govt.knowing full well there is no logical case in the indian situation to allow it as yet as it is premature.

posted by: br on 11.17.05 at 10:49 AM [permalink]

pl see
for specific articles on fdi in retail in india

posted by: br on 11.17.05 at 10:49 AM [permalink]

Somebody here had a reaction to the words "communist backed" Indian government - welcome to the strange world of indian politics.

Even though the country is decidedly moving to a two party system ,there are more political parties in India than you can count with all your neurons...and the evil commies are prevalent as well -which is rather strange in the world's largest democracy, and an indication of its socialist past.

The commies have abt 10% of the seats in the lower house of the Indian Parliament but it is good enough to be a crucial source of support for the present government- they are not a part of the Cabinet, they do not have any body representing them in the Govt of India - how ever this does not stop them from being the single biggest source of pain when it comes to issues of national importance. of course they are bankrupt morally, idealogically just like their comrades worldwide.

My own take for the hesitancy - India has no idea of what 100% FDI is going to do it's cherished policy of being as self dependent as possible - and does not want to know any time soon

posted by: Nagarajan Sivakumar on 11.17.05 at 10:49 AM [permalink]

It is clear that the Indian Government is all set to ignore or steamroller objections from the domestic business community not to open up retail sector. The enfeebled BJP and its other partners in the NDA have so far not found it necessary to unambiguously and forcefully articulate their position on this major issue of Trade Policy. Indeed, they seem to lack the will to function as a responsible Opposition beyond making perfunctory noises over issues of no great consequence. The only real objections that have received the Government’s ears have been from the Left parties. It remains to be seen, however, whether the Left would continue to advance its valid objections to resist the Government’s intentions or let the Government have its way due to political expediency. FDI in Retail is an issue where the Left may well decide not to give up its valid stand. It would be sad if that did not happen.

posted by: R.Ramasubramanian on 11.17.05 at 10:49 AM [permalink]

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