Deepak Dwivedi
The Government’s latest measures to liberalise foreign investment rules are a timely response to an emerging weakness in India’s external sector. The collapse in net foreign direct investment (FDI) in last fiscal to a two-decade low, despite record gross inflows, is a reminder that attracting capital is only half the challenge. Ensuring that a meaningful share of it stays back to build productive assets is equally important.
The reforms — simplifying FEMA regulations, easing FDI norms and making life easier for foreign portfolio investors — send the right signal. Global investors value policy stability, regulatory clarity and ease of doing business as much as fiscal incentives. At a time when worldwide investment flows are under pressure, India cannot afford regulatory friction that pushes investors elsewhere.
Yet the Government must also recognise that the problem is more structural than procedural. Net FDI fell earlier not because investors were shunning India but because multinational companies were repatriating larger profits and Indian firms are now investing more aggressively overseas. Both are characteristics of a maturing economy. They cannot be reversed by easing investment rules.
The early response reinforces this reality. Portfolio investors have returned to Indian markets, and direct investment has also shown impressive growth. Further growth will come soon as greenfield projects require board approvals, land acquisition, clearances and execution, often over several years.
The larger objective should remain making India the preferred destination for reinvestment. That requires predictable taxation, faster dispute resolution, efficient contract enforcement, reliable infrastructure and continued macroeconomic stability. Equally important is creating conditions that encourage existing multinational companies to expand their Indian operations rather than merely repatriate profits.
India’s strong growth prospects, expanding domestic market and manufacturing ambitions remain compelling advantages. The latest reforms are a welcome step in strengthening that proposition. Their success, however, will ultimately be measured not by record gross inflows but by higher net capital formation, greater reinvestment and the creation of factories, jobs and technology.