India: The Saga Of FDI – From Urban To Rural

Last Updated: 6 September 2005

Article by Hemant Batra*

The primary objective of foreign investment could not have been more aptly defined than by Dr. Jaslin U. Salmon, National Coordinator, Poverty Eradication Programme, Jamaica; when he stated, "Foreign investment must empower the poor".

Even though the data available proves that India is the tenth most industrialised country in the world and is emerging as a haven for a range of new industries and IT, the fact of the matter remains that India is a rural country and to break out of the economic straight jacket, it needs to divert its focus towards the aw natural rurals. Undoubtedly, the liberalization of trade policies during the last one decade has led the environment in India to become investor friendly. Most of the industrial and business sectors are today eligible to receive FDI under automatic route and with no ceiling. What are these sectors? What is the objective of FDI? Is there any formal Agenda? Or is it just a rat race or follow the flock principle for merely increasing foreign exchange reserve. Unfortunately, but true as it is, our Government has no clear understanding of the sectors specific in which FDI is being invited; it has no objective or agenda whatsoever except beating other nations in foreign exchange reserve. Let us analyze the acceptable model, scheme and concept of FDI regime for any developing nation in my own perception. According to me, business sector can primarily be divided into two categories – manufacturing & services. The factors which attract FDI in manufacturing are – civic infrastructure i.e. power, transport, telecom, roads, ports etc., availability of labour and obviously flexible/friendly regulatory and taxation mechanism; whereas for FDI in services, the only important factor is potential client and attractive offer. If that be so, then, one cannot expect much of FDI in rural so far as manufacturing sector is concerned because most of the factors (as above mentioned) attracting FDI would be missing in rural area. Services sector could be the main thrust area for the rural, whether it be education, construction, health, retail, technical services etc. provided the FDI policy is framed suitably.

If one analyzes the Indian FDI policy, one will notice that its primary focus has been on the manufacturing sector. This fact basically means that India has been allowing foreign investment in those sectors which are restricted to the urban areas. What we need is a regulatory mechanism to channelize the available FDI into areas that have been ignored but have immense potential for growth. India needs to focus on the FDI issues with respect to the rural areas so that they may along with the urban areas reap the benefits of the allocated FDI.

The FDI policies that have been laid down are not rural friendly in any way. Services sector has been ignored since the inception of liberalization in 1990. Only, infrastructure projects have been opened up for FDI and that too without proper policy formulation. The 100 percent foreign equity that is permitted in civic infrastructure and private development/construction has been diverted to core urban needs, like Expressways, MRTS, Flyovers, and Hotel Industry to integrated large townships. That would be inclusive of building houses in large numbers to suit the needs of the urban or the suburbs. Our policy makers should incorporate the need to develop the rural areas as well. The policy that allowed a 100 percent FDI in construction is therefore in my opinion incomplete and it needs to be extended so as to cover the needs of the rural. One essential point, I would like to mention here is FDI in road construction. This genre of construction simply happens to be one of the most expensive. Such elaborate measures are taken to widen the highways or roads that connect the states and towns, but least importance is given to the roads of the villages. This is so because there is no scarcity of funds when it comes to these high traffic movement areas, also the returns that the foreign companies get is quite high in terms of toll charges and that too over a short period of time, proving it to be more lucrative. Hence, such urban and national expressways related BOT projects attract aggressive FDI. What about state roads which connect towns to villages and so on? Because of lack of vehicular traffic in terms of feasibility for success of a BOT project on these roads, these projects have attracted only World Bank funds and not commercial FDI. Our government must basically improve the provisions for investing in the rural areas so that the foreign companies are by design attracted to such propositions. How we can lure the foreign market in the Indian rural is a question that needs to be answered. The government can acquire the land adjacent to the roads connecting the rural or which are in the rural areas easily with the help of compulsory provisions of the Land Acquisition Laws and the land owners could be adequately compensated. This land should be handed over to the foreigners on cost to cost basis, who in addition to the mending – widening and carpeting – could develop that stretch of land too. They could build resorts or retreats or country homes. This is where the investor could make returns on their investment and feel attracted in developing the rural infrastructure. The government should also extend benefit of tax holiday to the foreign investors in rural areas in whichever sector. The construction projects private or public in rural areas would lead to generation of employment as a result of which the standard of living would also improve.

The other sphere, which needs immediate attention, is that of ‘Retail’. The government of India should recognize the importance of the retailing business and its contribution to the GDP. Government is contemplating to permit FDI in this field, and it will be done within a matter of weeks as are the indications. This needs to be examined keeping the produce of the farmers in mind. The farmers should be given a platform where they can grow better quality crop, fruits and vegetables so that it may be brought to the retail window. The government needs to ensure investment in bio-tech and agriculture. If FDI is allowed in this sector, the foreign companies would establish large outlets for the sale of the ‘produce’. This would mean better storage facilities and increasing the shelf life of the products. Such kind of a market would also attract many people. One cannot simply treat retailing and shopping in line with the hotels and market complexes; we need to view it from a different angle so that we are able to welcome the rural sector too. There is no government plan for organizing the fruit and vegetable market as done in the case of grains, pulses, oil seeds, wheat paddy etc.

Real estate is another area where I believe the FDI needs to be made more flexible. Stating an ironical situation, as long as a foreigner sets up a business, he can purchase a piece of land. However, the minute he wants to buy a piece of land for his personal needs, he is dismissed off hand. The reason is we don’t have any policies by way of which he can acquire personal property. In countries like Canada, UK, USA and Australia our Indian Nationals have acquired vast acres of land to themselves, then why can’t we open up our real estate for the foreigners. This would also help in elevating the standard of living and alleviating to some extent - no matter how miniscule - the problem of unemployment. To elucidate on this, the foreigners who have shown an interest to buy land in India have always been in the rural areas. I believe India has put itself in a self-woven straight jacket, and has not been able to come out of the ‘colonial hangover’.

We allot so much importance to education, and why should we not; we are, if I may say so, the ‘think – tank’ of the world. What would all the top-notch soft ware companies do without us Indians? But today, how many brilliant students do we hear want to serve the nation? Barely a hand full in a billion plus population country – a grim picture. Providing better facilities at home would inspire and encourage the best and the brightest to stay home rather that migrate. FDI in education was allowed long ago; almost a decade now. The educational framework is still dependant on the UGC and Ministry of Human Resource Development. The problem that we are facing is not of unavailability of investment, but is that of lack of clarity in our own policies. A couple of years ago a Dutch company wanted to open about 300 play schools and increase it to about 1000 over a period of time. However, it was unable to do so due to non-cooperative attitude of HRD Ministry. Many foreign universities want to invest in India for 100% FDI in education is permissible and falls under automatic route but then the Ministry of HRD has no policy whatsoever in that respect. I fail to understand the point in permitting FDI in the face of absence of regulatory policies. It just does not make any sense. Also, those top universities that have shown an interest to open their large campuses in India will do so only in the rural areas due to the easy availability of land and cost factors. That would generate a series of advantages; reduce brain drain, increase employment during the construction and maintenance of these campuses, improve the quality of education and develop the vicinity around in the rural areas where these institutions have been established.

Our policy makers need to look at the situation from another perspective. The existing policies merely, need to be applied differently. We cannot forget that the heart and soul of India lies in its rural areas, so we should take a stopover in the urban but eventually reach the rural.


* Hemant BATRA is a Corporate, Commercial & Business Lawyer. He is the Director-Legal Services of Kaden Boriss Consulting Pvt. Ltd., a legal consulting, legal services and legal BPO Company. He is the elected Secretary General of SAARCLAW (South Asian Association for Regional Co-operation in Law). He is Member of high-powered national legal affairs Committee of Indo-American Chamber of Commerce.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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