Can India be called an open and investment friendly economy? If yes, why. If no, why not?
A series of steps are required to make an economy open for foreign and domestic investments. India started with a mixed economic structure in 1947 but has moved towards capitalistic structure since 1991. The New Economic Policy, 1991 started a series of structural reforms to change the nature of Indian economy so that foreign and Indian investors could make active contributions in providing investments for economic growth.
These ongoing steps will help us determine whether India can be called an open and investment friendly economy or not.
If Yes, Why?
The foremost requirement to create an investment friendly economy is to liberalise rules on investments, trading, imports-exports, currency conversions, FDI and ease of doing business. India has substantially moved forward in all these dimensions. The government has allowed FDIs in various sensitive sectors like defence manufacturing (74%) and coal mining (100%), due to which India is one of the top 10 recipients of FDI in the year 2019. In the ease of doing business index, India’s ranking has improved from 142nd in 2014 to 63rd in 2019 indicating that India is emerging as an ideal place of doing business. India allowed current account convertibility after 1991, which makes it easy for global traders to deal in Indian markets. FII rules in India are one of the most liberal in the world, making it a desirable destination of foreign capital.
The banking sector is considered backbone of every economy. India’s banking sector has expanded tremendously due to the huge untapped market and active support provided by the government. Domestic credit to the private sector as a percentage of GDP has increased from 7% in 1990 to 50% in 2019. Credit to the private sector is most closely correlated with economic growth as this variable measures the degree to which savings are allocated to productive uses which can stimulate economic growth. A deepening banking sector has attracted foreign investment in the space.
Major considerations of foreign investors are political stability, predictable policies and business friendly reforms. Indian Government has embarked on structural reforms in the form of GST, automatic route of FDI and ongoing labour reforms. All these steps have created an open market for foreign investors and allowed them to invest fearlessly in Indian businesses.
If No, Why Not?
An open and investment friendly economy takes care of fundamental economic rules. India has not yet completely adopted the reforms to be called an investment friendly economy.
Complete Capital account convertibility allows foreign investors to invest freely in the country in long term investments. India has not yet adopted complete capital account convertibility due to which many investors shy away from investing in india.
The Banking sector is experiencing NPA crisis for almost a decade now. The Government and RBI have not yet found a permanent solution to the deepening crisis in Indian Banking sector. Gross NPAs are expected to rise up-to 12.5% by March 2021. A high NPA ratio means that the asset quality in Banks is very poor. This makes it “not investment friendly” for foreign and domestic investors.
Policy stability includes positive structural reforms, policy stability and good regulation of economic growth and Inflation. India is on the verge of getting into the trap of “Stagflation”. Foreign investors do not want to invest in financially volatile economies. To be called an investment friendly economy, Indian policymakers need to keep it financially stable.
Various sectors in India are still not open to foreign investors, limiting their ability to make sound and rational investments and pushing them away from Indian economy. For example, investments in space, communication etc are still subject to government approvals. We cannot call ourselves an open economy until we open our markets to all kinds of foreign investments.
Conclusion-
Despite having some gaps in business ecosystem in India, it is one of the most preferred destination for doing business across the world because of its liberal policies, business friendly reforms, democracy and an open market