Don’t wait for RBI

Of the five ways in which foreign capital flows into the country,India has no reason to harbour hope that tourism will pick up anytime soon. Of the other four,the trade balance is expected to close out this year with a deficit of 9.7 per cent. Assuming that net invisibles does slightly better than last year’s $114 billion,the bulk of the foreign exchange inflow has to be then financed by foreign portfolio investment and direct investment. In this context,the latest data from the department of industrial policy and promotion,which says that the latter has dipped 67 per cent in the first quarter of this year,shows the merit of RBI Governor Subbarao’s observations.

In its annual report,released on Thursday,the RBI has held up the example of Singapore as investment destination. Subbarao has observed that the island has maintained its status as a premier business destination because of the pace at which all departments of its government clear investment proposals. Since portfolio investment tends to be fickle at times,India is obviously paying a heavy price for its on-off regulations on direct investment. The government could claim that it has removed obstacles like the retrospective taxation rules and GAAR,but the antipathy towards investment from outside has often run deeper. The delays are more than those in the legislative domain. In this fiscal,a net collection of $4.43 billion FDI in three months means that for the economy to reach a target of $37 billion FDI in the next nine months,there must be a flow of $3.62 billion every month. But this will be a steep challenge,given that the government has to still show clarity on how to treat foreign investment in brownfield projects in pharma,nine months after the PM made his intentions clear.

A reduction in the headline rate of interest by the RBI will help in the short term. What will help more in the long run,however,is for investment to be treated as a matter of urgency by the government.