CHAPTER-8

SUGGESTIONS AND

RECOMMENDATIONS
 Chapter- 8

Suggestions and Recommendations

8.1 Introduction
This concluding chapter deals with the suggestions and recommendations on the

issues that were raised earlier in order to overcome some of the problems either fully

or partially. In this chapter we also mentioned the limitations of the study and the

prospects of future research.

8.2 Suggestions and Recommendations

With a view to providing solutions to the problems relating to FDI environment in

India, suggestions can be made from different angles—structural, general and

specific—all requiring changes or modifications. Structural changes need actions

from administrative and political machinery. They may be time-consuming process.

Others require changes of attitude of policy-makers. Moreover, many of these

suggestions and recommendations are inter-related with each other. In that sense, it is

difficult to have an airtight compartmentalisation of the various suggestions and

recommendations. Nevertheless, we put forward our suggestions and

recommendations divided into three groups—all aimed at improving the efficacy of

FDI environment in the sub-sections that follow.

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8.2.1 Suggestions for Structural Changes

Structural changes require alteration or amendments to the policies that regulate the

investment environment in India. It is, however, an established fact that due to the

safe approach adopted by the Indian Government to policies with respect to the

corporate climate and conventions prevailing in the country, India was not much

affected by the global meltdown originated in 2008. Therefore, our effort to put

forward those structural changes that might be implemented but keeping in view of

maintaining the safe economic culture and in the light of previous experiences

accomplished in the last economic crisis.

Suggestions under this category are presented as follows:

1. The long overdue of the opening of the sectors for manufacturing units have

been received when FDI in most of the manufacturing units were permitted up

to 100% under the automatic route from 2005 and onwards. However, FDI

flows in non-manufacturing sectors are still greater than the manufacturing

sectors in India. The Government of India must ensure proper infrastructural

facility, specially implementing a single policy for the acquisition of land in

all over the India and also provide single window of operation for setting up

manufacturing units.

2. The mix picture of the reforms furnished in the FDI policy has been observed

throughout the period under the study. Sectors have multiple ups and downs in

respect of attracting FDI throughout the period. Mere reforms in the policies

will not produce their positive impacts in the real world. They are required to

be accompanied by the proper and effective infrastructures that are to be

provided by the appropriate authority.

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3. It is an accepted fact that despite having all the potentials, India is way behind

from its neighbour country China in respect of FDI inflows. However, both the

countries are the leading rank holders in making Double Taxation as well as

Bilateral Investment Treaties among the sample countries. Other countries

under the study have also made a lot of investment treaties and due to market

size of the South-east Asian regions; the effect of the global crisis was not

profound in these countries. However, it is worth mentioning that in India the

Rate of Corporate Tax charged to foreign companies are the highest among the

countries under the study. In Malaysia and Singapore, there is no tax payable

on capital gains (In Malaysia 5% tax is charged on Real Property Gains).

India proposed to implement the Direct Tax Code, 2010 with a new tax regime

such as, after implementation foreign companies will be taxed at rate of 30%.

However, this has not been made possible. The Government of India must

consider this matter very seriously keeping in view of the economic

advantages that have been the primary attraction for FDI.

4. India’s effort on the Double Taxation Treaty with Mauritius where the tax on

capital gain to be paid by the resident of Mauritius in that country only as well

as the possibility of the involvement of black money have been the major

cause for huge inflow of FDI into India. DTT with Mauritius has really

helped India to increase its position in FDI inflows. However, India has also

made comprehensive agreements as DTTs with other countries also but the

amounts of FDI flows came from those countries were way behind as

compared to amounts of FDI came from Mauritius. However, India gave away

much tax exemption in order to gain into FDI flows from Mauritius. Many

foreign companies as well as Indian companies have set up subsidiary

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 companies in Mauritius in order to claim the tax advantage. Circular 789 of

2000 as issued by the CBDT of India must either be withdrawn or amended to

nullify the effect of ‘Indo-Mauritius Tax Heaven’ status so that FDI will

directly flow to India and not through the Mauritius route.

8.2.2 General Suggestions

Suggestions under this head are outlined as below:

1. The analysis of regional FDI distribution showed uneven scenario in India.

Therefore, the benefit of the aid of foreign capital has not been enjoyed by all

the industrial houses located in the different parts of the economy to a large

extent. Therefore, all the other regions should be provided with the proper

incentives as well as infrastructure in order to make them more appealing to

the foreign investors.

2. The study found that flow of FDI is expected to make higher impact on the

GDP in the positive direction. FDI Stock, however, has not been found to

make positive impact on the GDP. Therefore, it is imperative to have

continuous flow of FDI in order to make positive growth in GDP. Mere

increase in the FDI Stock can not increase the GDP of the country.

Liberalisation of the policies in respect of FDI is sought to be more and more

utilised in all the countries under the study.

3. India’s promising future regarding attainment of foreign capital depends on

how India is ranked in the global investment report prepared by various

international authorities. ‘Doing Business’, prepared by the World Bank,

showed remarkable improvement in respect of protecting the investors but the

enforcement of a contract takes a long time and therefore, Government of

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 India must provide some mechanism to reduce such time since as the time to

enforce the contract increases the cost of implementing such contract also

increases.

4. It is recommended that the Government of India must encourage the foreign

investors to make investments in services sector since this sector has the

greater impact on GDP rather than the manufacturing sectors. However,

Government of India also encouraged the manufacturing sectors by

introducing Industrial Park scheme or by setting up SEZs where lots of tax

benefits are provided to those concerns set up under such scheme or zones.

However, southern and western parts of India were immensely benefited since

most of the infrastructure facilities like SEZs or Industrial Parks have been

located in these regions. Therefore, it is recommended that in order to sustain

overall growth of GDP these schemes or plans must be made available and get

implemented in other parts of India also.

5. Coefficient of Variation (C.V.) of FDI inflows shows the degree of

consistency of FDI inflows over the years. FDI inflows in India are not

consistent as compared to China and it is volatile at almost 42.45%. Therefore,

Government must stimulate the factors by making adequate economic reforms

that can ensure consistency in FDI inflows so that the economical activities do

not get hampered.

6. It is necessary for India to increase the extent of judicial assistance and

provide adequate measures to the ease of process both of which have not been

found much promising in respect of commercial disputes.

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8.2.3 Specific Suggestions

Suggestions under this head are presented as below:

1. The study found that a newly emerged sector, ‘Hotel and Tourism’, has made

the rank of 10th position in respect of FDI recipient. This has been made

possible due to offering a 5 year tax holiday to the companies that set up

hotels, resorts and convention centers at specified destinations, subject to

compliance with the prescribed conditions. A huge amount of investment has

been made in 2012 and placed this sector among the top ten FDI recipient

sectors in India. It was a great move by the Government of India. This kind of

attractive incentives can also be offered to other sectors like Computer

Software & Hardware sectors where foreign investments did not meet up to

the expected level.

2. India needs to improve the land information system so that geotechnical maps

and all information related to such land can be made publicly accessible. It is

also recommended to improve India’s financial services and most importantly

the labour market and more precisely the labor-employer relations.

Transparency from the policy makers must also needed to be reviewed. The

problem in India is that it has low rankings in both the labour-employer

relation as well as production process sophistication. In India, these two

factors are contrary to each other. If production process is sophisticated the

labour-employer relation is adversely affected since production process

sophistication may lead to labour termination or lay-off. Therefore, the labour

laws of India must be reviewed keeping in mind both of these two indicators.

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 3. The study found that there are differences in FDI reporting format among

countries under the comparison. In case of China, they include round tripping

domestic money reinvested in the country as FDI. They also include wide

range of activities in FDI reporting data. On the other hand, India did not

provide comparable FDI data in its reporting format. Therefore it is

recommended to adopt a uniform FDI data reporting format as per the

international standard.

4. Since RBI’s automatic route has been contributing the most of the FDI flows

in India and there exists route specific differences of FDI flows, more sectors

which are under FIPB/SIA, must be placed under the RBI’s Automatic route.

Since automatic route does not require the investors to fall into the hands of

procedural bottlenecks, foreign investors will be encouraged to take such

benefit.

8.3 Limitations of the study

The study is not free from some limitations. They are furnished below:

1. The study has analysed FDI inflows directed to the top ten sectors and top five

RBI’s Regional Offices of India. There are, however, sectors and regions

where the flow of FDI has important impact, have not been taken into

consideration for the analysis.

2. The study showed how the FDI Flow and FDI Stock make impact on the GDP

of the countries under the comparison. There are, however, other macro-

economical factors (i.e. foreign exchange, outward FDI, balance of payment,

inflation, etc.) that might influence the GDP positively or negatively which

have not been accounted for in the study.

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 3. Due to differences that exist in the FDI data reporting format adopted by the

countries under comparison, there is a possibility that the results of the test

might have been different if the data reporting format were equal.

4. Since the data pertaining to the growth rate of GDP and growth rate of

Manufacturing and Services sector in Chapter-6 were not available,

hypotheses were tested taking the period up to 2007-08.

8.4 Scope for future research

The scope for further research can be outlined as follows:

1. Impact of FDI and FPI on the GDP: A comparative study with respect to

Indian economy.

2. Inflow of FDI in India: A study of macro-economic factors.

3. Trend and Direction of FDI in India: A study of manufacturing and non-

manufacturing sectors.

4. Flow of FDI in India: A study with respect to the disinvestment policy.

5. Flow of FDI in India: A study in the light of economic reforms.

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