Will poor ranking on doing business index affects the FDI inflows?

In a scenario where P Chidambaram is working overtime to attract more FDI (foreign direct investment) inflows into the country, the recent World Bank report on ‘Doing Business’ has come as a dampener for the domestic economy. Experts are, however, unanimous that there is a need to introspect the system. They also suggested that government should improve the processes in order to increase the FDI inflows.

According to the ‘Doing Business 2014’ report, India has occupied the 134 position out of the 189 economies surveyed. Amongst the BRIC block (Brazil, Russia, India, and China) member countries, Russia has scored the highest rank 92, followed by China (96), Brazil (116), and India (134).

Ranking on this (doing business) index holds significant value for the Indian economy as it is a capital starved economy. Capital flows in the form of portfolio investment (FII flows) are not desirable to finance current account deficit (CAD) hence FDI is required. The situation has become worse in recent years with falling investments in the country. Foreign direct investment (FDI) slid by about 21 per cent to 36.9 billion dollars in the fiscal 12-13 as compared with 46.6 billion dollars in 2011-12.

Although the government has already relaxed FDI policy in 12 sectors, including telecom, tea and many others yet the FDI policy push has not yielded the desired results. Interestingly, during the April-August period of the current fiscal 13-14, FDI has grown by a meagre 4 per cent to 8.46 billion dollars when compared to the corresponding period of last fiscal.

India’s miserable rank implies that how difficult is the place to do business in the world. In July this year, South Korean mining giant Posco cancelled plans to construct a steel plant in Karnataka. Similarly, after waiting for seven years, ArcelorMittal scrapped plans for a steel mill in Orissa. Both companies cited similar reasons for pulling out: Weak market conditions and problems in securing land and mining licences in the country.

Similarly, even after allowing FDI in multi brand retail, big retailers like Carrefour and Walmart are demanding more clarity on the regulations required to operate in India.

The focus of India should be on far-reaching changes in the approval process and there is a need to improve business environment in the country. Sudip Bandyopadhyay, President, Destimoney Securities, said, “The miserable rank secured by India is definitely an eye opener for us. Our government should make easy processes in order to create business friendly environment in the country.”

“Labour laws, taxes and getting electricity are very critical issues in our country which need to be addressed immediately,” he added.

Likewise, Brinda Jagirdar, consulting economist (former chief economist at SBI) said, “We have to send right signals to the foreign investors who want to do business in India. If the government wants to increase the FDI inflows then government should improve the processes. Further, the government must try to remove all the investment bottlenecks and the decision-making process should be streamlined.”

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