With India's economic growth faltering as a result of weak governance, policy paralysis and opposition to reforms, investors feel the urgent need to push for plans to allow foreign direct investment (FDI) in the financial sector and multi-brand retail trade.
FDI in India slumped 78 percent to $1.2 billion in June 2012, compared to $5.7 billion in the same month in the previous year. It plunged 67 percent to $4.4 billion in the April-June quarter, compared to the same period in the previous year as investors continued to worry about the investment climate in the country, which is affected by the lack of encouraging policy from the government.
"With elections due by May 2014, this policy paralysis is likely to get worse during the coming two years and there is also a growing risk of populist decisions. Looking further forward, there is no guarantee that reform prospects will improve after 2014," Andrew Kenningham, an economist at Capital Economics, said.
Several policy announcements by the government have adversely affected investor confidence. The decision to retroactively tax overseas merger and acquisition activity related to companies based in India was one such case.
However, investors hope that the government will announce some measures to slow the increase in the budget deficit, and perhaps review tax legislation. However, gaining parliamentary support for more substantive liberalization will be a difficult task for Finance Minister P. Chidambaram.
When the government's allies and opposition parties say moves to allow the FDI will be disastrous to the country, they fail to note its positive impacts on the economy, which are essential to revive losing growth momentum. India's gross domestic product (GDP) grew by 5.5 percent in the first quarter, up from 5.3 percent in the previous quarter but down from 8 percent in the same period a year earlier.
Last month, in its policy statement, the Reserve Bank of India (RBI), cut its growth forecast for this financial year (April-March) from 7.3 percent to 6.5 percent. Investors worry that even this rate can turn out to be too optimistic with the global economic condition worsening and the disappointing governance policy.
The government is struggling to control inflation which has been hovering around the double-digit mark since December 2010. According to Reserve Bank of India Deputy Governor K.C. Chakrabarty, if FDI in multi-brand retail is effectively implemented, prices will decline.
Political parties opposed to the move say that it would be suicidal for small and marginal retailers and would affect thousands of traders in the sector. According to the 2010 Economic Survey report, India's retail sector provides job for 35 million people making it the second-largest employer after agriculture.
A major factor to be considered is that India has a big population in the working age group, which is between 15 to 59 years. According to a 2010 report by the Ministry of Labor and Employment, about 64 percent of the population in the country will belong to the working age group by 2012. It is crucial to understand the employment potential it offers while considering the FDI policy.
The government's decision would pave the way for global retail giants such as Wal-Mart, Tesco and Carrefour to set up their megastores in the country. Initial estimates by the government are that it will create over four million jobs in small and medium industry and another 5-6 million jobs in the logistics sector in the coming three years, according to Commerce and Industry Minister Anand Sharma.
Though this can be a tall order, employment opportunities in the rural and urban areas of the country would be certainly boosted. Employment would also be encouraged in various sectors, including agro-industry and food processing. It is also the correct step to support and promote infrastructure, including cold chains, warehousing, and logistics.
On a similar note, the possible expansion of international banks in India, thanks to plans by the government to allow foreign direct investment in the financial sector, is also seen with lot of suspicion. Employees of public-sector banks held a two-day strike in August against the plan. However, many investors and financial experts are of the opinion that FDI in the banking sector has become a necessity for India's economic growth.
"FDI will bring the latest technology in the banking sector to the country, which will help to improve its growth rate and eventually the economy," said Anand Nair, a financial advisor based in Mumbai.
The entry of multinational banks will force domestic banks to adjust their portfolios, in line with their new competitors. Some fear that foreign banks, with their low costs and low risk, would attract the best customers and leave domestic banks with borrowers showing higher risk levels.
However, the time for debate may be ending, as India finds itself in dire need of capital. The country's current account deficit climbed to 4.5 percent of GDP or $21.7 billion in the January-March quarter, up from $6.3 billion in the same quarter of the previous financial year.
"The country is in need to fill huge gap in capital requirements. This necessitates the need to have foreign capital. FDI essentially make sure that this necessity is fulfilled," said Jacob Alexander, an economist based in New Delhi.
Ensuring the liberalization of the financial sector and encouraging foreign investment would be a move in the right direction to lift market confidence. However, it is to be seen whether the government will show the courage to take the necessary measures in this direction, in the face of opposition.
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