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Budget 2021 must focus on policies that attract FDI

We need to understand that FDI is not just a capital injection but package of technology and expertise, which is required to steer the Indian economy

January 20, 2021 / 02:08 PM IST

Despite the global challenges faced in 2020, the rallying of the Indian stock markets painted a different picture. The real impact of this rally and the underlying positive sentiment is expected to be felt in the next financial year, which is why Budget 2021 is extremely crucial.

Foreign Direct Investment (FDI) is and has always been, a significant driver for every economy without the risks associated with debt instruments. The Department of Industrial Policy and Promotion has confirmed that as of September, India received FDI inflow of $39,929 as against $74,390 for entire financial year 2019-2020. This is reflective of the positive sentiment of foreign investors and we need positive measures to maintain this momentum to ensure a stable and consistent recovery of our GDP.

In line with its recent initiatives, the government has taken various measures to attract FDI and improve the ease of doing business in India. Some of these include: (i) shift of power from RBI to central government for making changes to the FDI policy; (ii) liberalisation of investments in sectors such as defence, civil aviation, insurance; (iii) clearly defined SOPs for timely disposal of applications under the approval route; and (iv) introduction of settlement schemes for procedural delays instead of compounding which was a time-consuming process.

However, these changes are not without its own set of challenges. These teething issues need immediate resolution to gauge any real positive impact of these measures.

While certain sectors have been liberalised, immediate focus is required on sectors such as manufacturing, automobiles, pharma, infrastructure, real estate, online gaming and streaming and cloud technology. Definitive guidelines which encourage investment in these sectors will provide an impetus to the Indian economy. The ambitious infrastructure projects require smart grids for distribution of renewable energy from all sources — solar, wind and water. Encouraging investment in these sectors will be a welcome move. Typically, these projects have a long gestation cycle for which FDI is the right instrument. While the government has issued SOPs, it needs further tightening and transparency.


Sectors which require prior approval are witnessing inexplicable delays which sends a negative signal to foreign investors who have the right appetite and expertise in such sectors. We need to understand that FDI is not just a capital injection but package of technology and expertise, which is required to steer the Indian economy.

Certain other measures are also required to boost the confidence of incoming investors. The present policies have encouraged assembling in India instead of manufacturing. If impetus is not given to encourage the entire supply chain (manufacturing-distribution-sales and consumption) to be out of India, chances are we will never be able to outdo the present world leaders of supply chain.

Extreme policing and prosecution of foreign investors for minor non-compliances may be avoided by our regulators. The new settlement scheme needs a combination with a reasonable and more specific approach on fee calculation. The recent laws being introduced wherein even independent non-resident directors face risk of criminal prosecution for non-compliance need a careful re-look.

Authorities need to be mindful of consequences of drastic action which may create fear of a police state in the minds of non-resident investors. Reluctance to appoint directors for fear of prosecution, leads to passive investments instead of strategic partnerships where the Indian company can enjoy meaningful contribution of not just capital but expertise and technology. The tax policies could also do with more transparency and less policing.

Further, notifications need careful analysis and mindful implementation to ensure that incoming investments are not stuck in a black hole. Case in point is the recent Press Note 3 categorising investment from neighbouring countries under the approval route. Lack of ‘clarifications’ on what constitutes beneficial ownership has created uncertainty in the market. Many applications by such investors are pending since for a long time now, without any guidance on expected timeliness for approval, if any.

Foreign investor funds with negligible investments from these countries are reluctant to invest any further money in India pending such clarifications. The judicial developments in some sensitive cases are also being keenly watched for outcome. An appeasing outcome to safeguard only the Indian players may disrupt the faith of foreign investors on the binding power of foreign arbitral awards, which is the preferred dispute resolution mechanism in such cases.

While the government has taken several positive steps, the expectations from the forthcoming budget are extremely high to safeguard the sentiment of the markets, especially after a year when the world faced unprecedented challenges and disruption. An optimistic view also suggests that there will be vacuum created for emerging economies to capture the supply chain market. India with the necessary power, resources and global support can take advantage to fill this vacuum, should we decide to act timely in the right direction.
Moin Ladha is a Partner at Khaitan & Co. Views are personal.
Purti Minawala is a Principal Associate at Khaitan & Co. Views are personal.
first published: Jan 20, 2021 01:36 pm
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