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Global Economic Powerhouse
Context:
India’s path to becoming a global economic powerhouse depends on several key factors, one of which is improving the ease of doing business.
More on News:
- While India made strides in the World Bank’s Doing Business rankings, it also faced setbacks on key indicators before the annual report was discontinued in 2021 due to allegations of discrepancies and rank manipulation.
- Nevertheless, simplifying the business environment is essential for fostering economic growth.
- Foreign Direct Investment (FDI) plays a crucial role in this process, acting as a catalyst for innovation, growth, and job creation.
About FDI:
- FDI is a major driver of growth and socially beneficial outcomes, offering more than just capital.
- It brings technology, expertise, and global best practices essential for the development of various industries.
- FDI creates jobs, boosts exports, and enhances the overall competitiveness of the economy.
Current Status:
Insurance Sector:
- The Indian government imposes restrictions on foreign investment, limiting foreign companies’ full participation in the market.
- Although the FDI equity cap was raised from 49% to 74% in 2021, it still prevents foreign investors from gaining full control of Indian units.
- This reduces competition and innovation in the sector, resulting in fewer consumer choices and potentially higher premiums as domestic insurers face less pressure to offer competitive products.
- While lowering GST rates could help reduce premiums, increased competition is needed for the sector to evolve in a way that better serves Indian consumers.
Media and Digital Media Sectors:
- Similarly, FDI restrictions continue to affect India’s media and digital media sectors, limiting the entry of international companies and reducing content diversity.
- Press Note 4 allows up to 26% FDI in digital platforms for news and current affairs, but ambiguities remain around the definition of “digital media” and the scope of affected entities.
- Questions about whether these rules apply to social media platforms or search engines add to the regulatory challenges faced by global players.
- Easing FDI restrictions in this sector could drive innovation, improve content quality, and foster global partnerships, enhancing the technological capabilities of local media and diversifying perspectives.
E-Commerce and Retail Sectors:
- These sectors also face complex FDI regulations that need simplification.
- These sectors operate under four different FDI regimes: FDI is not permitted for inventory-based online operations, while 100% FDI is allowed through the automatic route for online marketplaces.
- For single-brand retail trading, FDI up to 100% is allowed without government approval, provided 30% of the goods are sourced locally if FDI exceeds 51%.
- In multi-brand retail trading, 51% FDI is allowed with government approval, subject to similar local sourcing requirements, but engaging in e-commerce is prohibited.
- Simplifying these rules would make it easier to do business, especially in retail, where complex sourcing regulations often deter foreign investment.
The Economic Survey 2018-19 emphasises the critical relationship between investment and innovation, highlighting how investment facilitates innovation, which in turn drives income growth.
Investment as a Catalyst for Innovation
- Private Investment: The survey underscores the importance of private investment as a key driver of economic growth, job creation, and demand.
- Micro, Small, and Medium Enterprises (MSMEs): The survey highlights the role of MSMEs in driving innovation.
- Behavioural Economics: The survey discusses leveraging behavioural economics to encourage investment in innovation.
Innovation Leading to Income Growth
- Increased Productivity: Innovation often leads to improvements in productivity, which is essential for economic growth.
- Job Creation: As businesses innovate and expand, they require more labour, thus creating new job opportunities.
- Global Competitiveness: By fostering an environment conducive to innovation, India can enhance its competitiveness on a global scale.
Way Forward:
- While supporting local businesses is crucial, it should not come at the expense of limiting consumer choice and stifling innovation.
- A balanced approach that fosters competition while protecting citizens’ interests is needed.
- India requires bold FDI reforms to boost business ease and achieve sustainable economic growth.
- Relaxing FDI restrictions in key sectors would lead to job creation, technological advancement, higher productivity, and improved global competitiveness.
