India Set To Lift FDI Caps?

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Mar. 20 – India’s Finance Minister P. Chidambaram has stated that India is likely to lift “outdated” caps to areas of foreign direct investment (FDI). He affirmed that the country needs to clean out the cobwebs accumulated in India in order to spur foreign investment into the country.

“Many caps can be removed or certainly relaxed,” he stated last Friday in an interview with the Khaleej Times, saying that a review of limits across all sectors of FDI into the country had begun.

If delivered, such a review could usher in the largest relaxation of FDI policies the country has seen since the early 1990s. They are expected to include about two dozen industries ranging from banking and finance to telecommunications and retail.

In various sectors at the moment the FDI limit is below 100 percent. Chidambaram has estimated that India needs to attract at least US$75 billion more in FDI this year alone just to fund the existing current account gap.

“Some of these caps are completely irrelevant in terms of the changed situation,” he said. “We need to clear some of the cobwebs accumulated in India and go out and woo specific business houses.”

FDI into India fell 34 percent last year to just US$22.8 billion, partially as a result of uncertainty over various Indian tax rulings, globally deemed unfavorable to foreign investors in the country.

Further liberalization of foreign investment caps will be a welcome reform for foreign investors.

“This creates transparency on what is being done and shows that the government is not only serious on continuing with the reforms but also implementing them,” said the chief India and Southeast Asia economist for HSBC Holdings Plc, Leif Eskesen. “It is important to demonstrate the determination and willingness to move forward on these policies.”

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