For the last 2-3 years, Indian economy is going through a big transition phase. There are many strong initiatives taken by the government in the recent past. The government focused towards the idea of ease of doing business and increment in foreign investment in Indian economy. As a result of the same India jumped from 142nd to 130th rank in terms of ease of doing business as per the World Bank Report in 2016. The progress is good but still the country is not satisfied rather it is having a bit of bigger hunger.
In order to improve the ranking with respect to ease of doing business, government is working on various aspect of foreign investment including Foreign Direct Investment, Foreign Institutional Investor and Foreign Portfolio Investment. In the same line, the key decisions taken by the government would transform India to an investment hub for global investor and would invite investment from all parts of the world. The much awaited and largely unsettled decisions passed recently must be taken into consideration to decide the global fortune of Indian economy. First, government has provided relaxation to FPI from taxation in case of indirect transfer of share except to the category 3, which would be taxed if domestic private equity fund that has deployed 50% of its money in India and if it sells its portfolio to any buyer who is not located in the country. Second, foreign banks prior to decision were required to open multiple entities in India to get around restrictions would now be able to trade through the single entity. Third, SEBI has increased the combine F&O trading limit by enhancing the caps on contract and on the market value of positions held. All these decision regarding foreign investors would have far reaching impact on Indian economy particularly due to phase, which the economy is passing through. These decisions would improve the sentiments of global investors towards India as a global market. All the impacts of decision would be long lasting and the good part is, all would improve the health of economy. Single entity trading of foreign banks would raise the exposure of global investors to Indian derivatives and would invite large global investment. Removal of barriers by SEBI would facilitate higher derivatives cap and better management of portfolio risk, which would increase the volume of investment. Moreover, these decisions deliver the results dynamically and drag the attention from everyone. It shifted capital inflow towards fairly positive position in February which has been negative in the preceding four months amid uncertainty over implementation of tax measures including the General Anti Avoidance Rule which was resolved on the day of the budget.
The government adopted more structured approach towards FDI promotion as compare to FII and FPI since the revolutionary decisions regarding the latter were taken little late. And as a result of structured approach, India became the top destination for FDI which reached to 40 billion USD with the growth rate of 29% in the year 2016-17. This was the result of government changed approach towards the same. But all those approaches are now matter of past. However, for the present and future also India is running on the same track of revolutionary and structured approach. The biggest reform recently passed by the Indian government is the reduction in the role of FIPB (Foreign Investment Promotion Board). The decision would abolish the traditional method of approval from the board and now most of the FDI would be approved through automatic route, only certain segments which are considered sensitive for economy and security would require prior clearance from the board. And above all India appears to be a more attractive opportunity as it is doing way better than the rest of the world due to availability of excess capacity and large business potential for foreign investors. The greater capacity along with the decisive decision making have attracted lot of foreign investment and no one can deny the point, large and unharnessed markets have boosted the process as well. But what is left yet, India still requires ample of FDI in non-service sector like manufacturing and core infrastructure. The government is doing its bit with the realms of budget. As of now, it goes to sectors which have less regulation and things are fairly straightforward.
The mechanism of decision making and the parallel increase in FDI, FPI and FII investment does makes us feel good. It is really good for the entire Indian economy, but this is not the end of the analysis. A person must consider all the points to derive the state of Indian economy and there are still points which must be pondered over. Though the increase in the foreign investment is the positive sign for the economy but on the other hand, if we look at the overall balance of payment, we expect the current account deficit not to be as comfortable as what it was. The trade balances are likely to widen due to slow export growth and relatively larger imports. India is yet shining and inviting huge amount of foreign investment despite rhetoric protectionism in US, unpredictable global slowdown and the Brexit. It is only because of its higher growth rate amid global slowdown and its focus to grow in the line of investment which helps it to emerge as a favorite market. It is always good for every such country to have more foreign investment but it makes the economy more volatile to all global factors. Despite various factors, India continues to run on high growth track for more than 2 years and the reason behind it is the sound performance in the domestic level and export segment. But recently a slowdown observed in the domestic growth. The foreseeable decline in the global remittance from all over the world due to US policy changes and Brexit, which acts as a shield against global recession during 2008 is raising the concern, whether India would withstand strongly against all such global factors and crafts its growth journey on its own.
The author can also be reached at- ajayagrawal19191@khandelwaljain.com
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