CAN the hoped-for surge in foreign investment help India wriggle out of the current economic morass marked by high current account deficit (CAD), depreciating Rupee and decline in economic growth?

The answer is obviously a big ‘No' as the Government has to do much more than cosmetic changes to win back the confidence of both foreign and domestic investors.

Indian Government is pulling out all stops to liberalize foreign direct investment (FDI) and Foreign Institutional Investment (FII) including share & bonds purchases (portfolio investment) by FIIs on the stock market.

After increasing their investments from $9 billion in financial year 2005-06 to $ 31 billion in 2012-13, FIIs have turned net sellers and have been exiting from stock markets, especially the debt segment. FDI has already been on the decline over the last two years.

On July 16, the Prime Minister, Dr. Manmohan Singh chaireda meeting of ministers and officials in which it was decided to liberalize either the FDI or foreign equity caps in nine sectors and/or FDI approval procedure was simplified.

The decisions taken at the meeting are a mere cosmetic exercise undertaken at the behest of Finance Ministry, which is desperate to tap all sort of foreign investments.

Prior to this, the Finance Ministry had sent a draft note to other ministries for discussion. Authoritative sources quoted the note as saying “in the backdrop of fairly modest inflows of foreign investment by way of FDI in the last two years, the continued pressure on the CAD (current account deficit), and following the Budget announcement regarding rationalizing the definition of FDI and FII, a need has been felt to re-examine FDI Policy with a view to easing the process of FDI inflow and liberalizing the limits and caps.”

The note had laid down certain broad principles of foreign investment apart from FDI caps into three categories for specific liberalizations. The first principle is that FDI should be permitted in all areas that are not prohibited.

Taking into account the definition of control over a company that is being revised by the Government, the second principle provides for 49% FDI in areas where “foreign ownership and control cannot be allowed” as in the case of armament manufacture.

The Finance Ministry is plugging for 100% FDI through automatic route in areas where ownership and control are not an issue. It has also mooted 74% FDI ceiling in other sectors where a degree of Indian participation or oversight is needed.

The Government is thus expected to liberalize the FDI policy further and also bring clarity to FDI and FII investments on the basis of this note ,as well as, the recommendations made by a committee on foreign investment. This panel submitted its report to the Finance Ministry in the last week of June under the chairmanship of the Secretary, Department of Economic Affairs, Arvind Mayaram.

Taking cues from the Finance Ministry, stock market regulator Securities and Exchange Board of India (SEBI) announced on 12'th June significant liberalization of investment by FIIs in debt securities listed on the bourses.

SEBI is expected to undertake more reforms to attract FIIs to Indian capital markets on the basis of recommendations made by its Committee on Rationalization of Investment Routes and Monitoring of Foreign Portfolio Investments that submitted its report on 12'th June.

The Finance Minister Mr. P. Chidambaram has himself been interacting with potential foreign investors during special road shows organized in different countries over the last months.

In spite of all these efforts, the foreign investors have not yet opened their purses for India.The Government should realize that increasing or withdrawing the ceiling on foreign investments alone cannot attract investors. They, like the domestic entrepreneurs, want clear-cut and stable policies, a concept that is alien to the Indian governance system.

Indian economic policy and regulatory framework is perennially subject to pressures from corporate lobbyists, diverse political dogmas, etc. In India, every policy or regulation is thus subject to change.

Assuming that the Government somehow manages to enhance foreign investment inflows, it should realize that borrowed FDI-FII feathers alone can't help the country steer away from the current balance of payments crisis.

The durable solution to this problem lies in improving the country's economic competitiveness, increasing exports and reducing imports. This is no doubt a long haul to wiping out trade deficit and CAD.

Knowing that the illusive magic wand of foreign investment might not work, the Government is keeping open its option to issue its maiden sovereign bonds issue or prod public sector banks to offer long or medium-term bonds to cash-rich non-resident Indians across the world.

If all these initiatives do not help the Government reduce CAD from the present alarming 5% of gross domestic product (GDP) to less than 2.5% of GDP, then the Government would have no option but to take a structural adjustment loan from International Monetary Fund (IMF).

Coming back to the initiatives taken at PM's meeting, the decisions are cosmetic at the best and clerical at the worst, except for the controversial and substantive decision to hike FDI cap from 74% to 100% in the case of mobile and landline telephone service companies.Take the case of existing foreign investment cap of 49% of equity capital (26% FDI plus 23% FII) applicable to stock exchanges, commodity exchanges and power exchanges. The same 49% investment would now not require approval from Foreign Investment Promotion Board (FIPB). It is now proposed to be brought under the automatic approval route, which requires an applicant to register its investment proposal with Reserve Bank of India (RBI).

Routing applications through FIPB has never been cited as hindrance in attracting foreign investment. So what difference does it make if an investment is brought under automatic route? In any case, a foreign investor would have to seek the approval of the regulator concerned – SEBI in the case of stock exchanges, Forward Market Commission in the case of commodity exchanges and Central Electricity Regulatory Commission (CERC) in the case of power exchanges.

Take the case of oil and gas sector, if a foreign investor wants to invest in public sector refining and marketing company, then in can acquire upto 49% stake with FIPB approval. It is now proposed to dispense with FIPB approval while retaining the 49% cap. This is a mere cosmetic reform as the public enterpriseswould in any case have to seek the approval of the Ministry of Petroleum and Natural Gas (which acts as owner of Govt. stake) for inducting any foreign investment.

The Government approval, inone form or the other, is thus needed to usher in foreign investment. Even the so-called automatic approval of a foreign investment proposal alone can't enable any company to take its project off the ground. The company has to cross several regulatory hurdles, often in series.

Under the existing governance system, a project can get delayed, as in the case of South Korea's Posco steel project, for donkeys years due to litigation and agitations that at times turn violent over acquisition of land, mining rights, environmental and forest clearances.

This chaotic situation is going to persist as numerous stakeholders fight to get the best out of scarce natural resources in an excessively over-populated country.

The Government remains as indifferent as ever to the need for creating a single-window clearance of projects from environmental, forest, wildlife, tribal rights, coastal protection regulations and air and water pollution control. A project promoter must currently secure approval on each of these counts separately from different entities.

This sequential approval system not only delays actual investment for years but also forces the project promoter to seek extensions of the validity of approvals already obtained.

The investors have to always bear the risk of an approval getting quashed or stayed by a tribunal or a court following initiation of an public interest litigation. A case in point is the across the board ban on iron ore mining in Karnataka State that adversely affected several iron and steel plants.

Another case is the litigation in the Supreme Court over Lafarge's limestone mining export project. A company of this French multinational mines limestone in Indian State of Meghalaya and exports it is a sister company in Bangladesh through cross-border conveyor belt. The mining operations had to be suspended for several months during the litigation in 2010.

The regulations-compliant Indian subsidiaries or associates of foreign investors not only face the risk of disruptions in their operations due to PILs but also can also lose their investments.

An obvious instance in point is the 2 G scam that led to cancellation of 122 cellular licences by the Government following the Supreme Court's verdict on a PIL in 2011. After securing Government approvals, Certain foreign companies make mega investments in the Indian companies that had bagged these licences.

The foreign investors (Norway's Telenor and Russia's SistemaJSFC, Abu Dhabi's Etisalat and Bahrain's Batelco) would now have to wage a long battle with the Government at various forums to retrieve their lost investments in the cancelled second-generator (2G) cellular licences, leave aside compensation for loss of alternative business opportunities.

There have also been other developments that have badly shaken the foreign investors' confidence. As we know, the Government retrospectively amended the Income Tax Act in May 2012 to levy CGT on Vodafone Group Plc (VGP) subsidiaries that acquired controlling stake in Vodafone India Limited from Hong Kong-based Hutchison Whampoa Limited (HWL) through certain tax heaven-based transactions.The Government did this after losing the Rs 20,300-crore CGT case against VGP in Supreme Court in January 2012.

There are several big-ticket, high-profile tax claim notices slapped lately against oil and gas giant Shell and wireless mobile major Nokia.

The resolution of these issues and enactment of direct tax code and goods and services tax act, etc. would serve a better signal to all investors than mere tinkering FDI and FII caps.