The document discusses India's recent changes to FDI norms and provides criticism of the reforms. It argues that the reforms seem aimed at gaining quick foreign investment rather than long-term growth. While some industry norms were eased, changes were mild overall and the government still maintains control. The reforms are seen as more of public relations moves rather than impactful changes. The government is said to lack vision and ability to implement meaningful reforms due to limited power and inaction within the ruling Congress party.

1. Huge FDI Non-Reform
The dollar-rupee rate status has been made into a crisis and that crisis has
perpetuated a set of announcements on easing the norms that govern FDI. It is not
clear whether the fall of the rupee was a crash or a correction. Some, such as I, believe
that it was a long overdue correction given higher and persistent inflation in India than in
the developed world.
Others, such as those in the government, put more emphasis on the possibility of
greater inflation due to cheaper rupee. And therefore the need to prevent the rupee from
falling into the 60s and ideally taking the dollar-rupee rate back to somewhere close to
the 55 number.
fast bread, not Growth
It is impossible to foretell where the markets will take the rupee if the government does
not intervene. Yet we believe in the power of the markets to provide a better exchange
rate than that mandated by the RBI or the finance ministry. And that is why we
encourage well-functioning forex markets, with minimal intervention by the RBI. I would
expect the same rules should apply in an election year as in other years. So what if we
do not like the fact that the rupee is now much cheaper, the fact is we created the
macro-economic conditions that led to this outcome and the markets are broadly taking
it towards its natural level. But the government has decided that it wants a stronger
rupee.
Understanding the objective of any change in policy is important, as that enables a
better appreciation of what has been achieved versus what could have been. In this
tranche of FDI reforms, the objective is not growth and economic efficiency (they may
be by-products though), but earning quick bucks in the form of FDI. And even if

2. Greenfield investment does not occur, as long as there is some probability that FDI will
flow in, the rupee will get some support. Some of the changes are, therefore, more
sound bytes than actually impactful. That is, changing the norms in an industry where
there is no inherent investor interest will have zero impact in terms of FDI, but will give
the government a larger list to release to the press. That is the precept around which
these reforms, if we can call them that, are based.
The mildness of Change
One aspect of these changes was the domination of the services sector. It is well known
that Indian industry is in a bad mess, and we could do with some changes in the laws
that govern manufacturing investment. Apart from large industry-backed easing of FDI
norms in defence production and in refining, there is nothing for industry. The reason is,
of course, clear; this government has given up on the manufacturing sector. It sets up
commissions and committees under well-meaning geriatrics, but does little by way of
what is actually required to save this sector from annihilation. The lower rupee would
have helped India’s much-weakened manufacturing sector compete both domestically
and internationally.
Another facet of these changes has to do with the meekness with which changes
have been made; in some cases 26% has been changed to 49% and in others FIPB
approval has been changed to automatic approval. In other words, the cap has been
loosened a bit, but the cap remains omnipotent.
This further shows that the negotiation powers of the PM & Co with the Congress
high command are highly limited. In other words, not only does the PM have little say on
economic issues anymore, but the government under Sonia and Rahul is not one which
has the will or the ability to reform.
Zeros of Reform
This gets us to the last major issue. This government has little in its kitty. It is unable to
change policy because it has few degrees of freedom available to it politically. It is

3. unable to place executive orders because of lack of vision within the Congress. And it is
unable to have a vision or generate a consensus because there is no clarity within
itself.
And, therefore, its only resort is cheap talk and costless signals to play up the
economy, under the mistaken belief that if you shout something repeatedly and in
different ways, eventually the investors will start believing as well.
There is a significant possibility that this government will return after polls next year;
for its own sake if not for the country’s, the Congress needs a new leadership that
knows how to get things done. But it is choosing as its flag-bearers a set of people who
are zero at implementation and quite inept at reforming where reforms are really
required.
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