FDI reforms: The US must now act its part out

Washington: It shouldn't but it always takes an alarm to wake up the government of India. The Americans rang one loudly, the rupee was slipping badly and the FDI flows were drying fast, that even the UPA couldn't ignore the economic mess anymore.

The timing of the new measures on raising FDI caps, including in the "holy cow" sectors of defence and insurance is significant. The announcement came three days after three top UPA ministers returned from Washington where they met a range of US corporates and officials with a long list of complaints.

Prime Minister Manmohan Singh ostensibly acted on the recommendations of the Mayaram Committee. But the sudden energy to implement a report perhaps came with the realization that a weight-bearing pillar of Indo-US relations needed major repairs - the American business community. US companies needed to be reassured that the India story continues.


The new higher caps on FDI in defence production and insurance are still subject to approval by the cabinet committee on security and the parliament respectively. Reuters

Thus the rollout on Tuesday. The PM raised the FDI limit to 100 percent in telecom and up to 49 percent in insurance from the earlier 26 percent. In single brand retail, the government will now allow 49 percent FDI automatically and even 100 percent after proposals go through the Foreign Investment Promotion Board or FIBP. Caps have been raised across 13 sectors with some caveats.

Will the new measures do the trick, stop the bleeding and attract investments quickly? Not really. The reaction from US companies and business associations is one of continued skepticism. They want to wait and watch. They consider the moves as a case of too little too late.

They note that the new higher caps on FDI in defence production and insurance are still subject to approval by the cabinet committee on security and the parliament respectively. They are not confident of speedy delivery.

The assessment in Washington is that the hikes in FDI caps are largely due to a serious fiscal situation at home and the desire to attract investments quickly. While the move is welcome, they are waiting to see what criteria would be used for allowing 49 percent FDI in defence as opposed to the automatic approval of 26 percent before they pop open the Champagne.

The reality is that the signals sent over the last nine years have been confused at best and negative at worst. To undo the mess in the last few months before elections requires a miracle. Finance Minister P. Chidambaram has tried hard to turn the tide of negativity but he alone can't work the magic.

Most investors and company executives are likely to wait for the general elections to be over and a new government to emerge in New Delhi before they take a second hard look at India.

In the meantime, the overriding sense is one of damage control to prevent further slippage.

Why things came to such a pass where US officials and the business lobby both turned sour on India is mainly to do with reality of New Delhi. But why it took so long for New Delhi to measure the depth of anger is to do with a lack of attention and inability to read signals in time and act decisively. Strategic thinking is desperately needed to shore up and energize bilateral relations.

It is when Secretary of State John Kerry conveyed the dismay on India's policies on preferential market access, intellectual property protection and cross border taxation last month, that New Delhi seems to have actually woken up.

Chidambaram, commerce and industries minister Anand Sharma and deputy chairman of the planning commission, Montek Singh Ahluwalia rushed to Washington last week to collectively say: we care and we want you.

The ostensible reason was to attend the US-India CEO forum and the annual summit of the US-India Business Council. But it was really to assuage feelings, listen to smarting executives and assess the damage. They registered the complaints, defended Indian policies and stabilized the government-to-government relations. But who dropped the ball?

What is noteworthy is that New Delhi is at least trying to act on US complaints. The Obama Administration on the other hand has simply shrugged its shoulders on the one major complaint India has - the new immigration reform bill, which targets Indian IT companies.

The wily US Trade Representative Michael Froman whom Chidambaram and Sharma both met gave no assurances on putting his shoulder to the task. Instead he pushed the WTO warning in India's face - act with us this time in Bali.

No doubt Froman, with his bluster and hyperbole, was pleased at the high audience he got but he is not doing the larger relationship any favors if he can't think beyond today's transactions.

Updated Date: Dec 20, 2014 22:19 PM

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