5 Reasons Why FDI is Limited in India

Posted on June 16, 2010 in Business and Economy

Rishabh Gupta:

Over the last decade India has emerged as one of the favourite destination for foreign investors. But compared to China, India still lags behind in attracting foreign investment. Some of the main factors which tend to act as roadblock for foreign investment in India include political considerations, poor infrastructure, inadequate government policies, rigid labour laws and rampant corruption.

  1. Political Considerations: The fractious nature of Indian politics has led to expiry of one party rule system. No government is possible these days without the support of regional political outfits. These regional satraps in the name of protecting the interests of poor, oppose liberalisations of policies which might lead to increase in foreign investment. Government which is dependent on support of these outfits is hence forced to slow down liberalisation of FDI policies. Besides, opposition parties often oppose foreign investment senselessly, inciting locals on the way, just to ensure that government doesn’t run away with the credit for bringing investment. A case in point is POSCO steel plant in Orissa which is yet to take off due to opposition by locals. A change in government also sometimes leads to step motherly treatment towards projects setup by foreign investment during previous government’s tenure. Such kind of unpredictability makes foreign investors sceptic of investing in India.
  2. Infrastructure: Despite the importance being accorded to infrastructure by the government it continues to be a reason to not invest in India. India’s roads still continue to be one of the worst in the world. The power cuts remain a way of life. States like UP, Bihar which face severe crunch of infrastructure are also the ones to attract least foreign investment. Existing infrastructure projects often do not get adequate government support leading to withdrawal of foreign investment. Enron faced such situation when it pulled out of the Dabhol power project which had an FDI of $2.9 billion citing government opposition to the project.
  3. Government Policies: India happens to have one of the highest tariff rates in the world. Most of the East Asian countries charge taxes up to 30%. However the corporate taxes are charged in excess of 35% in India. A cap on the foreign equity in certain sectors also limits foreign investments. Though in recent times, government has taken measures to facilitate easy entry of foreign investors in India, but the exit barriers are still not as flexible. Investors find it difficult to exit the market freely, even if they find entering relatively easy.
  4. Labour Laws: India has abundance of manpower available at one of the cheapest rates in the world. But, the inflexible nature of labour laws often makes investors shy away from India. The present Indian labour laws forbid layoffs of workers for any reason. These laws protect the workers and thwart attempts to restructure business. To retrench unnecessary workers, firms require approval from both employees and state governments-approval that is rarely given. Labour unions extort huge sums from companies through over-generous voluntary retirement schemes and often resort to strikes in case their demands are not met. India needs to upgrade its labour laws to attract foreign investors which in the long run will prove beneficial to labours also.
  5. Corruption & Bureaucracy: In India corruption is the norm, not an exception. India is afflicted with a crisis in governance, with corruption in nearly every public service. In order to set up an operation in India, investors whether local or foreign have to pay some form of bribery. Despite steps by government in recent times to simplify norms for foreign investors, various surveys reveal that foreign investors still find it difficult to cut a path through the paper work of overlapping government agencies. International reports on transparency rank India as one of the most corrupt country every year. A combination of legal hurdles, lack of institutional reforms, bureaucratic decision-making and the allegations of corruption at the top have turned foreign investors away from India. Many of the foreign investors have become leery of the country’s history of discrimination against foreign companies and its reputation as a slow, difficult, bureaucracy ridden environment to do business.

image: http://kpsconsultants.com/fdi__fema