Foreign capital is critical to India's growth. But at the same time it is important to protect the domestic industries from foreign competition. There are some industries which may require government protection while there are others where sectoral caps must be lowered in order to attract foreign capital. Hence, the government must take calibrated steps in this regards. It needs to figure out sectors that require foreign capital but position the caps in such a way that the interests of the domestic industries are well protected.
Recently, the government opened up the gates of foreign investment for retail and aviation sectors. While the move faced severe opposition the government finally got ahead with it. But with the economy slowing down there is an urgent need to attract more long term capital in order to revive growth. As such, Finance Minister, P Chidambaram, has stated that the government is considering removing or relaxing some outdated caps in certain sectors. This move will further attract foreign capital to Indian shores.
While a conducive policy is must to attract foreign capital it must be noted that the business environment in the subject country is of equal importance. For example, assume that a country has fully liberalized investment norms but the business environment in the country is not conducive. In that case, the country will hardly attract any foreign capital. And this is somewhat the case with India now. While it does attract reasonable amount of foreign capital due to strong growth prospects the recent policy indecisiveness has made foreign investors jittery. For instance, despite opening up of Foreign Direct Investment (FDI) in retail sector, we haven't seen any foreign retailer setting up shop in India. Red tapism, frequent changes in policies, lengthy process to get the necessary approvals makes the business environment in India bureacratic.
Also, when it comes to reforms there is a lingering fear that if the opposition party comes to power they may get trashed. This may put the foreign capital at risk. Hence, foreign investors are skeptical about investing in India. In short, there is lot of uncertainty with respect to policy reforms and the operating environment is not conducive. This is proving to be hindrance in attracting capital.
Overall, we feel that while the right policy moves are a key to attracting foreign capital, creating an investor friendly environment is equally important. If not, liberalization will fail to attract foreign capital.