India ranks 134th in ease of doing business; and out of 40 nations assessed by the OECD, the country has the 33rd most complex regulatory environment, 37th most restrictive FDI policies, and most restrictive tariffs on trade. Moreover, businesses in India must obtain as many as 70 certifications to operate. As a result, despite being an attractive market, it has managed a sub-optimal inflow of FDI.
However, the new Government has changed all that. Overseas funds are rushing to invest in India. In fact, at least three sovereign funds have invested over $ 5 billion in the past eight months. Canada Pension Plan Investment Board (CPPIB) formed a JV with real-estate developer Shapoorji Pallonji Group to invest in commercial real estate in India, and formed an equal real-estate finance company with Ajay Piramal group's Piramal Enterprises, which will specialise in debt and structured finance. The fund committed $ 200 million in the first and $ 250 million in the second venture. Further it has now agreed to invest over Rs 2,000 crore in L&T's infrastructure arm, L&T IDPL.
Two other funds are scouting for investments among India's real estate and infrastructure developers. Abu Dhabi Investment Authority (ADIA), which had invested around $ 500 million over the past decade, has now purchased a 51 per cent stake in Jaypee Group's thermal power projects for $ 1.5 billion jointly with a Canadian pension fund and local PE IDFC Alternatives Fund through its power company Taqa, owned by ADIA
In February this year, a Chinese working group submitted a five-year trade and economic planning cooperation plan, offering to finance as much as 30 per cent of the $ 1 trillion targeted investment in infrastructure during the 12th Five-Year Plan (2012-17) to the tune of about $ 300 billion.
Clearly, the tide has changed. The Narendra Modi Government is thinking smartly to focus on those issues and areas that can give it a quantum leap. In line with this thinking rests the logic of allowing FDI in defence. India opened up the defence equipment industry to the private sector in May 2001, but restricted foreign participation to 26 per cent in this capital-intensive and sensitive sector. India is one of the largest defence importers in the world with a minuscule component of exports. At present, the country imports over $ 8 billion worth of defence equipment and its defence budget is growing at an average of 13.4 per cent annually since 2006-07. Liberalising ownership to 49 per cent will provide the required impetus to this segment, which can bring in big ticket investments in FDI that could, in turn, kick-start manufacturing.
So while resolving mired projects, arbitrating disputed claims and refining the administrative process to facilitate quicker business decisions remain a current priority for the government, policies that can enable impactful and scalable growth are on top of PM's think-tank's list. The Union Budget is one platform where these ideas will come to the fore. The biggest impact would be the surge in FDI across the board into India. As per the latest UNCTAD report, India has slipped behind Indonesia to 4th position among most favoured FDI destinations in 2013 and drawn $ 28 billion. The last two years have been a total loss where the country has suffered on account of indecisiveness and obstacle-laden administrative processes. Now with both areas under thorough reform and with global flow of FDI set to grow to $ 1.85 trillion by 2016 from current $ 1.45 trillion, the timing for India couldn't have been better. This 'dollar tsunami' is a welcome one.