Mumbai: Making a case for opening up the multi-brand retail and the atomic power sectors to foreign investments, an RBI study on Wednesday said policy uncertainty is partly responsible for slowdown in FDI into the country.
"The government should consider allowing foreign investment in sectors such as multi-brand retail and atomic power, a globally preferred FDI sector," the Reserve Bank paper on 'Foreign Direct Investment Flows to India' said.
The study suggested that "institutional factors, such as, policy uncertainty," are causing the slowdown in FDI inflows to India despite robustness of macroeconomic variables.
"... an empirical exercise...did suggest the role of institutional factors (government's to implement quality policy regime) in causing the slowdown in FDI inflows to India despite robustness of macroeconomic variables," it said.
Following opposition, including by its own ally Trinamool Congress, the government had to suspend its decision to open the multi-brand retail sector to foreign investments.
The paper said, "Given the international experience, it is argued that FDI in retail would help in reaping benefits of organised supply chains and reduction in wastage in terms of better prices to both farmers and consumers."
FDI inflows to India remained sluggish, when global FDI flows to EMEs recovered in 2010-11, despite sound domestic economic performance. Gross equity FDI flows moderated to $20.3 billion in 2010-11 from $27.1 billion a year ago.
The study further said as the India integrates more with the global economy and the domestic economic and political conditions permit, there may be a need to relook at the sectoral caps, especially in the insurance sector.
"The demands for raising the present FDI limits of 26 per cent in the insurance sector may be reviewed...," it said.
A Bill to raise the FDI cap in insurance sector is pending in Parliament.
The RBI paper also said another "important sector" that"may merit a revisit" is the generation, transmission and distribution of electricity produced in atomic power, where FDI is not permitted at present.
The recent trends show that the moderation in gross equity FDI flows during 2010-11 has been mainly driven by sectors such as construction, real estate and mining and services such as business and financial services, it said.
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