New FDI decisions boost reforms

The new measures on foreign direct investment (FDI), announced by the government this week, will give a boost to the economic reform process which is considered to have taken a back seat recently. The BJP’s defeat in the Bihar assembly elections may have prompted the government to come out with the new measures. The electoral drubbing had given an impression in some quarters that the government had become weak and may not have the will to take important decisions. But the government may have wanted to give the message that its reform agenda had not been affected by the defeat and that it will pursue the course of economic reforms. The measures announced to liberalise FDI in a number of sectors are of a major nature. They have been widely welcomed by the investors. It is to be noted that they are executive decisions taken by the govern-ment, and did not need legislative changes or support.

The relaxations in the FDI regime in a wide range of sectors including defence, banking, construction, broadcasting, civil aviation and manufacturing will make Indian business an attractive destination for foreign investment. It will also make it easier to do business in India. Banks will be able to expand their capital base with different types of foreign investors being allowed to own up to 74 per cent in private banks, separately or collectively. It is important for the private banking sector to be strengthened because, even with some proposed reforms, government-owned banks will take time to gain health. Procedures have been simplified and approvals made easier, with investments up to 49 per cent being put under the automatic route in the key defence sector. The lifting of many restrictions in the construction sector and the provision for automatic repatriation of proceeds will help the beaten down sector to look up.

Construction is an important area because it has backward and forward links in the economy. The government also has an ambitious housing programme. All sectors covered by the new FDI regime will benefit from the measures.

While these decisions at the executive level are welcome, there is much ground to be covered by way of enabling legislation. The alienation between the government and the opposition and the paralysis of parliament have resulted in failure to enact key legislations. It is the government’s responsibility to secure the support of opposition parties for them. The most important among them are the constitutional amendment to introduce a goods and services tax regime and the bankruptcy law. The government should ensure that they are passed in the winter session of parliament.