Till the ushering in of the era of liberalisation and globalisation, Indian approach had been to prefer external aid (which was, as noted earlier, mainly loans) rather than foreign investment.
This not only added to our external indebtedness, but also kept the FDI at a negligible level. There was such a huge cumulative build-up of over-regulation by the government and corresponding legal and institutional framework, that it has not been possible to lower those controls to international levels even now.
The process of dismantling this regulatory framework is on, but the task appears to be an unending one. Consequently, our ability to attract FDI is still very weak. UN World Investment Report (WIR), 2003, says that if India wants to attract more FDI, then it should improve its FDI policy, introduce labour reforms, improve tax regime, and pave the way for further reforms.
skbdevelopers.com
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It is also important that in our enthusiasm to attract FDI, we should not lose sight of protecting our economic and social interests. The restrictions, therefore, cannot be removed overnight.
This has to be done only in phases. For example, as in September 2003, credit rating of entities making FDI in private banks was mandatory. Similarly, effective foreign holding in insurance joint ventures was not allowed to exceed 26%.
The net result is that, till now, India has been able to attract a very small amount of FDI (though there are many countries which have been still less successful). And currently, we are facing a situation in which we are to reconcile between:
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(i) Protecting our domestic interests; and
(ii) Meeting our WTO commitments and facing other pressures for opening up our economy to FDI in those sectors where we are hesitant to do so, such as services, print media, retail trade, legal services, post and courier services, etc.
World Development Report, 2003, of UN Conference on Trade and Development (UNCTAD) says that India can attract more FDI provided it accelerates economic reforms.
It says that India has the advantage of a large market size and potential, as also that of skilled and low wage labour.
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China is getting far more FDI because its policies are more FDI friendly, its procedures are easier and its labour laws are more flexible.