Eye on FDI, Centre to ask state govts for investment-friendly reforms

The Centre is currently engaging with various countries to boost FDI inflows, which dropped to $26.5 billion in FY24 from $42 billion in FY23

To promote competition among states in attracting foreign investments, the Centre plans to urge states to enhance access, reduce compliance burdens, reform land and building regulations, and improve infrastructure such as power supply and law enforcement, according to a report by The Financial Express (FE).

These elements are expected to be part of an ‘investment-friendly charter’ currently being developed by Niti Aayog. The states’ performance in meeting these criteria will likely be monitored and ranked.

An official told FE that states should leverage their unique strengths to target specific companies for investment and ensure that current investors expand their operations locally rather than relocating to other states. For instance, if Tesla decides to enter the Indian manufacturing sector, it might consider states where the electric vehicle ecosystem is already developing.

Last month, Prime Minister Narendra Modi also urged that states should adapt their policies to meet global standards if necessary. He noted that states that are proactive in governance and focus on a single-point strategy are more likely to retain investors for the long term. Additionally, he suggested that states should establish land banks and implement necessary reforms to meet land requirements.

FDI inflows dropped in FY24

The Centre is currently engaging with various countries to boost foreign direct investment (FDI), which has recently seen a decline. Net FDI inflows to India dropped to $26.5 billion in FY24 from $42 billion in FY23.

Land and building regulations in India have significantly restricted the use of factory land, limiting enterprises’ ability to allocate capital effectively. Reforming these regulations could reduce business costs and increase job opportunities. Modernising land records and introducing land parcel-based property cards could also help reduce litigation.

It is estimated that a standalone factory loses around 50 per cent of its land to standards like setbacks, ground coverage, and parking requirements. In most states, factory buildings can only occupy 40 to 60 per cent of a plot. Liberalising building standards could help states unlock productive land and create more jobs.

Additionally, states are encouraged to update building regulations to increase the base floor area ratio (FAR) for commercial buildings in municipal and development areas to at least 5, and for buildings in central business districts and transit-oriented development corridors to 5+2.

States may also receive incentives to implement these reforms under various schemes.