Removing RBI from FDI way won't be enough to attract investors

FEMA provision, which allowed RBI to restrict or regulate cross-border transactions, has been deleted

In a move to attract investment by removing bureaucratic hurdles, the government is expected to do away with the Reserve Bank of India's (RBI) nod for foreign direct investment (FDI).

Now, investors will only need the clearance from the Foreign Investment Promotion Board (FIPB), which will be acting as a single window clearing agency for foreign investments.

A provision of the Foreign Exchange Management Act (FEMA), 1999, which allowed the RBI to restrict or regulate cross-border transactions and acquisition or transfer of immovable property to foreigners, has been deleted.

There are two ways through which FDI can come into India: one is the automatic route, through which investments are allowed in sectors which have been granted 'automatic' status, while the other route is by taking all the necessary approvals.

RBI is already represented in the FIPB and thus seeking a second round of clearance from them made little sense. Foreigners require approval not only to invest in India, but also at the time of exit.

Most of the FDI that has come into the country is through the automatic route. Between April 2014 and February 2015, the total FDI inflow into the country stood at about $41 billion, of which only $7.4 billion came through the approval route (FIPB).

What is equally interesting is that the government would regulate the norms pertaining to foreign individuals and firms purchasing property in India.

Similarly, the government is also contemplating on doubling foreign exchange remittance for purchase of immovable property to $250,000. Until recently, the RBI had been deciding on liberalising or tightening remittance norms for individuals as part of its exchange-control mechanisms.

The steps clearly suggest that the government is putting its act together to attract foreign investment in the country. But this is only half the job.

After the Prime Minister Narendra Modi's recent visit to China, Zhao Gancheng, director of South Asia Studies at the Shanghai Institute for International Studies, said: "Modi is trying hard to attract foreign companies to invest in India. But Modi's target will not be easy to achieve, for there are bigger challenges awaiting him down the road."

Infrastructure bottlenecks like frequent power failures, poor roads and delays at ports for transportation and occasional labor unrest discourage investors. Unless these are addressed, it will not be easy for the country to attract investments.

"Although Modi has been traveling all year long, and delivered some fruitful diplomatic results, the biggest lesson (for him) is how to improve the country's domestic environment for investors after all these trips and promises. Only in that way will he absorb foreign funds and push the nation's economy back on a healthy track," Gancheng said.

Vinod Mittal, managing director of Ispat Industries pointed out: "The Prime Minister has been very effective in conveying strengths of the Indian market. But red tape is still a problem. It is necessary to get officials to focus on project implementation instead of causing unnecessary problems."

To its credit, the government has more or less addressed the retrospective taxation issue. While the intentions are right, the pace and piecemeal approach through which the measures are being announced is affecting corporate confidence. It is one year since the government has come in place and we are still not ready with our single window. What is inside the window also needs to be cleaned up.