June 19, 2017 9:09 am JST

India's latest pro-investment move more show than substance

Approval board slated for dismantling was largely sidelined by earlier reforms

YUJI KURONUMA, Nikkei staff writer

Indian Prime Minister Narenda Modi, right, met last year with Masayoshi Son, left, chairman of Japan's SoftBank Group. (Photo courtesy of the Indian government)

NEW DELHI -- India's plan to simplify its approval process for foreign investment by eliminating a high-profile review body is likely to do more to burnish Prime Minister Narendra Modi's reputation for cutting red tape than actually encouraging investment.

The cabinet agreed May 24 to scrap the Foreign Investment Promotion Board, a body composed of senior officials from the finance, commerce and other ministries that handled requests for investments worth 50 billion rupees ($777 million) or less. It met about once a month over the previous year, considering an average of 16 applications per meeting but approving only about four. Contrary to its name, the board often urged applicants to rethink details of their proposals or turned them down outright.

The government will shift approval powers to the relevant ministries. The old two-stage process, in which the FIPB consulted with the ministries before reaching a decision, will likely be cut to a single step, though the details are still being fleshed out.

The business world and markets have applauded the move. The benchmark Sensex index set record highs on four straight trading days starting May 25. Chandrajit Banerjee, director general of the Confederation of Indian Industry, said that doing away with the FIPB will streamline approval of foreign investment, boosting capital inflows and thus promoting growth and employment.

Yet the actual impact may be limited. When the FIPB was formed in the 1990s, it handled the majority of foreign direct investment. It is now responsible for less than 10%. FIPB approval is no longer required for majority stakes in all but 11 industries, with retail, pharmaceuticals and telecommunications among those still requiring reviews.

The Modi administration is accelerating efforts to lower barriers to foreign investment, including raising caps on company stakes and expanding the range of industries where no advance approval is needed. The elimination of the FIPB is part of this effort. Some, including the Japan External Trade Organization, contend that the aim of the move is to strengthen New Delhi's reformist image.

Foreign direct investment in India topped $60 billion in the fiscal year through March 2017. But this represents only an 8% increase, marking the first time growth has fallen below 20% under Modi. The economic uncertainty caused by last year's demonetization of high-value bank notes has dampened investor enthusiasm.

India stands at 130th in the World Bank's Ease of Doing Business ranking. The government will need to do much more than scrap the FIPB to achieve Modi's goal of breaking into the top 50, including effectively administering the goods and services tax being rolled out next month and streamlining construction approval and dispute resolution.

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