FDI has legacy problems, says IIF chief

The Indian government's current foreign direct investment (FDI) policy in banking, aviation and other sectors would become erroneous if it were to last for long, Charles Dallara, managing director of Washington-based Institute of International Finance (IIF), said today.

"If this (FDI regulation) is a lasting policy, I think it will be a move in the wrong direction," Dallara said. He cautioned that India has little time to spare to get capital from abroad if the country wants to realise its potential. The flow of FDI into India could rise three-four times over three to four years if foreign investment was allowed in a range of sectors that are now heavily regulated.

Dallara was speaking to reporters after a two-day seminar organised by IIF on strengthening of capital flows and foreign investment and assessing investment outlook.

Bejoy Das Gupta, IIF deputy director - Asia-Pacific, pointed out that India has been attracting investors to its capital markets because of its regulatory advances.

Dallara said the growing economy, robust corporate sector and capital market and the banking services were among the encouraging happenings in the Indian economy, but FDI is India's weakness as there has been no headway in liberalising regulation of foreign investment given the existence of the legacy of licencing.

"The (foreign investment) environment needs to change dramatically, though it won't change overnight. We should be willing to give the coalition government time to consolidate. The power sector is under-funded because of policy inadequacies and the fiscal deficit is absorbing capital that can be put for much better use," the IIF managing director said.

Gregory B Fager, IIF director, Asia-Pacific, said the restrictions on FDI is because of the fear of losing control. "There are no concerns in China that opening up will amount to selling the country to foreigners. That message has not sunk in India as yet," Fager said.

When asked about Indian banks not being able to open branches in the US, Dallara said Indian should be allowed to expand overseas be it in the US or other western countries.