The Indian government is discussing ways to further liberalize foreign direct investments, which could trigger capital inflows crucial to fund economic growth, Finance Minister Pranab Mukherjee said Friday.
India’s economy has expanded nearly six times since 1991, when it first opened its markets and allowed foreign investments to flow in certain sectors.
Mr. Mukherjee’s comments come amid a mounting risk of dwindling capital inflows, which are headed for their first drop since the fiscal year ended March 2003. Capital is crucial to fixing the country’s infrastructure and creating jobs in the $1.3-trillion economy.
Foreign direct investment in 2010 fell to $24 billion, from $27 billion in 2009, even as it grew elsewhere in Asia. Overseas portfolio investors, who once raved over India’s stockmarket, have pulled out nearly $2 billion in the past two months, reflecting fears of overheating.
However, such investments in emerging markets like Thailand, Indonesia and Brazil have surged. Direct investment into Brazil, for instance, jumped 16%, to $30.2 billion last year, according to the U.N.
“Institutional and policy reforms are necessary for improving productivity and effectiveness of our social development strategy,” Mr. Mukherjee said.
The government spends heavily on social sectors such as rural jobs, health and education as part of its so-called “inclusive growth” policy and relies mostly on private capital to spur industrial economic activity.
The economy is expected to grow 8.6% this fiscal year to March 31, the fastest pace among all major economies other than China.
“We have to ensure that the revival in private investment is sustained and matches the pre-crisis growth rates,” Mr. Mukherjee said.
Though the government has done little recently to stimulate foreign capital investments, multinational companies, lured by India’s growth, still hope to expand business in India as Western economies hobble out of the global crisis.
Asia’s third-largest economy holds tremendous potential for U.S. and European retailers such as Wal-Mart Stores Inc. and Carrefour as only a small portion of India’s retail market is organized. The local retail industry is currently estimated to generate annual sales of nearly $450 billion.
However, India’s retail regulations are a hindrance. Multi-brand retailers such as Carrefour can only operate wholesale outlets and provide back-end support to local operators.
Foreign ownership of supermarkets and big department stores faces stiff political opposition over fears that neighborhood stores will perish if they have to compete with big multinational retailers.
The Indian government has, however, indicated that it might bring some flexibility to existing rules. It has recently sought views from the public on the issue of allowing foreign direct investments in multi-brand retail.
Last month, BP announced it would buy into local oil and gas fields for $7.2 billion, which would be the largest foreign investment yet in India.