Domestic investment must also be a priority

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Bikky Khosla | 23 Sep, 2014
Efforts to attract foreign investment have seemed to get a fillip with the new government coming into power. It is also good to see a welcome shift in our foreign policy towards tackling the issue, with the PM focussing on the economic side of diplomacy more than ever before. This is best exemplified by his recent bilateral meetings with Japanese and Chinese leaders. His scheduled visit to the US this week can be viewed in the same way. Needless to say, these efforts deserve much credit and praise -- foreign investment is a must for our capital starved middle income country. This, however, by no way means that we should stop bothering about domestic investment.

A recent media report quoted an expert as saying that the share of India's "non-corporate" segment -- comprising mainly SMEs including partnerships, proprietorship and the self-employed firms -- is around 40 percent of the country's investment rate against around 8 percent by FIIs and FDIs combined. They also account for a large part of the national income and national savings, but make up only 36 percent of the outstanding bank loans. This is because, he adds, Indian banks are not much interested to serve small businesses. This data clearly shows that adequate support to our SMEs can make a far bigger difference in ramping up investment in the economy.

Lack of availability of credit is not the only challenge facing the micro, small and medium businesses of the country. As I have said scores of times, red tape, power shortage, high costs of raw materials and fuels, technological obsolescence, ineffective implementation of the government schemes, limited access to international markets, and so on . . . there are several major challenges that must be addressed first to help Indian small businesses grow and thus encourage them to invest more. In addition, we have to convince our local businesses first that doing business in India is no longer difficult and only then will foreign investors feel comfortable investing here.

The government is also inviting foreign investors to invest in industrial parks in India -- there is nothing wrong about it, but at the same time strong efforts should be pushed to strengthen our SEZs. At present, hectares of land are laying vacated in many notified SEZs as investors find them unattractive due to a number of reasons, including imposition of minimum alternate tax and dividend distribution tax. Recently, a government minister has said that some tax incentives may be restored for these zones and they may be exempted from Land Acquisition Act as well. While such changes will be welcome, I think a detailed study could reveal many other challenges faced by these zones.

I Invite your opinions.