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2014 | OriginalPaper | Chapter

3. Foreign Direct Investment Policy in South Asia

Authors: Pravakar Sahoo, Geethanjali Nataraj, Ranjan Kumar Dash

Published in: Foreign Direct Investment in South Asia

Publisher: Springer India

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Abstract

In Chap. 2 we analysed the economic performance of the five South Asian countries during the last three decades. Results indicate that South Asian countries have improved their macroeconomic performance during their reform period except Pakistan. In this chapter, we present FDI policies of South Asian countries which are important for understanding FDI inflows to the region. The chapter highlights the fact that though the South Asian countries had a fairly restrictive regime in the early years of their independence, they have liberalised their FDI environment considerably in the recent years with emphasis on single window clearance, speedy clearances, encouraging private sector participation through PPPs, and several incentives to foreign investors including tax sops, setting up of SEZ, investment promotion zones, and BOIs to keep up the pace of FDI inflows to the region. Overall, there has been a complete turnaround in the FDI policy, from closed to an open-door policy with most of the sectors being open to foreign investment with little variation across countries. All the five South Asian countries have been very proactive in improving their FDI policy efficiency to attract more FDI into their respective countries. However, some strategic sectors like defence, railways, and arms and ammunitions have been barred from foreign investment. Given the immense potential of the region to attract FDI flows, the chapter has also identified and detailed the country-wise measures required in future to keep up the pace of FDI inflows and the pending reforms that need to be implemented to help South Asia sustain its growth and FDI momentum.
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Footnotes
1
ADB (2007), South Asia Economic Report: FDI in South Asia.
 
2
Investment proposals falling under the automatic route and matters related to FEMA are dealt with by RBI, while the government handles investment through approval route and issues that are related to FDI policy per se through its three institutions, namely, the Foreign Investment Promotion Board (FIPB), the Secretariat of Industrial Assistance (SIA), and the Foreign Investment Implementation Authority (FIIA).
 
3
The ceiling of 400 % of net worth, however, is not applicable for (a) investments made out of balances held in the Exchange Earners’ Foreign Currency (EEFC) account of the Indian party or out of funds raised abroad through ADRs/GDRs and (b) Indian companies engaged in the energy and natural resources sectors, such as oil, gas, coal, and mineral ores, though they would require prior approval of the Reserve Bank of India (Khan 2012).
 
4
The policy comes with a few riders keeping in mind the interests of ‘mom-n-pop’ (Kirana store), improving supply chains and getting Indian SMEs to adopt to the latest technologies. The riders are that FDI in multi-brand retail is to be allowed in 51 cities with population of more than one million, 30 % of total procurement is to be made from Indian SMEs, investment of 50 % of total FDI fund in back-end infrastructure, and veto power is to be given to states to allow foreign multi-brand retailers.
 
5
However, there is no free lunch and FDI supported by big retailing will affect impact on Kirana shops, as they lack the financial muscle to stand up to the challenge in terms of variety, quality, packaging, offers, etc. It is most likely that unorganised retailing would have comparatively slow growth. However, with proper financial support, unorganised small retailers may evolve over time adding more to product varieties that carry out their store renovation and innovative customer catering such as home delivery and credit sales to survive in the market. In fact, it would make them competitive.
 
6
Gujarat state has transferred various state labour laws to the Development Commissioner in order to achieve flexible labour laws in SEZs.
 
7
For example, Gujarat facilitates the creation of apparel parks, gem and jewellery parks, R&D institutions, and centres of excellence.
 
8
Dee (2009) emphasises on autonomous and independent institutions to review policies for identifying better policy options and assisting policy coordination within government for effective structural reforms.
 
9
See http://​dipp.​gov.​in for day-to-day updates on issues related to foreign investment.
 
10
Such as defence (opened up recently to a limited extent), rail transport, and prohibited sectors such as (1) retail trading (except for single brand product retailing), (2) atomic energy, (3) lotteries, and (4) gambling and betting
 
11
For more FDI policy in India, see Sahoo and Nataraj (2008).
 
12
In this context, Press Note 18 (1998 series) was a provision by which foreign companies entering into a JV with an Indian company needed to get a “no objection” from their Indian partner before they set up another JV with a new partner or even a 100 % owned company in the country. The provision was misused by Indian promoters who arm-twisted their foreign partners even if their own JVs were languishing or defunct. The provision was seen as a severe disincentive by foreign companies to align with Indian partners with majority stake in the JV and was an impediment to FDI inflow. Under Press Note 1, foreign firms will not need permission from Indian partners before setting up a business in a related field. They will, however, need permission if setting up a business in the same field as their Indian JV.
 
13
Following tax exemptions are available in different sectors: Deduction of 100 % of the profit from business of Development or operation and maintenance of ports, air ports, roads, highways, bridges, rail systems inland waterways, inland ports, water supply projects, water treatment systems, irrigation projects, sanitation and sewage projects, solid waste management systems; Generation, distribution and transmission of power; Development, operation and maintenance of an Industrial Park or SEZ; By undertakings set up in certain notified areas or in certain thrust sector industries in the North-eastern states and Sikkim; By undertakings set up in certain notified areas or in certain thrust sector industries in Uttaranchal & Himachal Pradesh; Derived from export of articles or software by undertakings in FTZ/EHTP/STP; Derived from export of articles or software by undertakings in SEZ; Derived from export of articles or software by 100 % EOU and; An offshore banking unit situated in a SEZ from business activities with units located in the SEZ.
 
14
A person resident outside India, who has been permitted by RBI to establish business in India, has general permission to acquire immovable property in India, which is necessary for the activity. A non-resident Indian (NRI) can acquire by way of purchase any immovable property in India other than agricultural/plantation/farmhouse.
 
19
The value of spare parts should not, however, exceed 10 % of the total C&F value of the machinery.
 
20
Direct investment fell from US$ 70 million in 1972 to 0 in 1973 and turned negative (to –US$ 6 million) in 1974. It did not recover until 1981.
 
21
It takes less time and costs to start a business in Pakistan than in India or any other country in the subcontinent. Pakistan also scores high investor protection. See World Bank’s Doing Business 2012.
 
23
Index of Economic Freedom measures the pro-business policy environment of a country.
 
24
The general condition is that the manufacturing enterprises have to export 80 % of output while the service sector has to export 70 % of its output.
 
25
Investment Policy Review of Sri Lanka (UNCTAD 2003)
 
27
By the end of 2001, there were 30 DTTs in force and another seven pending. They cover all the principal FDI home countries.
 
28
Since Nepal is a small country with a unique ecosystem, the government is sensitive to the environmental impact of industries. Projects must go through environmental impact assessments and initial environmental examinations.
 
29
Although this appears to be contradicted by the central bank, which explicitly states that it does not guarantee convertibility on the capital account
 
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Metadata
Title
Foreign Direct Investment Policy in South Asia
Authors
Pravakar Sahoo
Geethanjali Nataraj
Ranjan Kumar Dash
Copyright Year
2014
Publisher
Springer India
DOI
https://doi.org/10.1007/978-81-322-1536-3_3

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