RED TAPE VS RED CARPET: THE INSIGHT OVERVIEW OF INDIAN

SCENARIO

BJB AUTONOMUS COLLEGE

SOURAV SAMAL

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CERTIFICATE OF ORIGINALITY

This is to certify that SOURAV SAMAL Bachelor of Commerce student of

B.J.B.(AUTONOMOUS) COLLEGE, BBSR has successfully completed the
Project entitled “A STUDY ON RED CARPET VS RED TAPE: AN
INSIGHT OVERVIEW OF INDIAN SCENARIO”.

The project report is based on the original work done by the candidate herself
and fulfils the requirement of the seminar which is necessary for the partial
fulfilment of degree in BACHELOR OF COMMERCE.

It is to the best of my knowledge and belief that the work has not been submitted
elsewhere for the award of any Degree.

Signature of the guide

Dr. PRAFULLA KUMAR ROUT

2
DECLARATION

I SOURAV SAMAL hereby declare that this dissertation entitled “A

STUDY ON RED CARPET VS RED TAPE: AN INSIGHT
OVERVIEW OF INDIAN SCENARIO” has been prepared by me under
the valuable guidance of Dr. PRAFULLA KUMAR ROUT, ASSOCIATE
PROFESSOR in Commerce B.J.B.(AUTONOMOUS) COLLEGE, towards
the partial fulfilment of award of Bachelor of Commerce required in the
curriculum for 2016-2019.

I also declare that this project report is not a replica of work done by any
other person and has not been submitted to any other University or College
for the award of degree.

SOURAV SAMAL

BCOM FINAL YEAR

ROLL NO: BC16-264

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ACKNOWLEDGEMENT

The satisfaction that accompanies the successful completion of any task

would be incomplete without mentioning people who made it possible,
whose encouragement and consistent guidance crowned my efforts with
success.

At the outset, I would like to express my heartful indebtedness and deep

sense of gratitude to my faculty guide “ Dr. PRAFULLA KUMAR ROUT”
for sharing his knowledge and giving me guidance and generous co-
operation.

I am also thankful to my family and friends for their continuous support

and encouragement.

DATE:30th January 2019

PLACE: BHUBANESWAR {SOURAV SAMAL}

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PARTICULARS PAGE NO.
CERTIFICATE OF ORIGINALITY I
DECLARATION II
ACKNOWLEDGEMENT III

CHAPTER 1: BACKGROUND PAGE NO

OF THE STUDY

1.1 INTRODUCTION

1.2 OBJECTIVE OF STUDY

1.3 SCOPE OF THE STUDY

1.4 CHAPTER PLAN

CHAPTER 2: LITERATURE REVIEW PAGE NO

 RESEARCH PURPOSE

 PRIME MINISTER STANDS ON THIS

SPECIAL ISSUE
 SOME RELATED HISTORICAL VIEWS

 SUGGESTIONS GIVEN BY INDIA

CHAPTER 3: CONCEPTUAL PAGE NO.

STUDY

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3.1 GLOBAL SCENARIO

3.2 POLITICAL STREAMLINE

3.3 RED CARPET IN OTHER

COUNTRIES
3.4 INDIAN SCENARIO

3.5 EXAMPLES OF RED TAPE

AFFECTED AREAS
3.6 GOVERNMENT INITIATIVES

CHAPTER 4: PAGE NO.

ANALYTICAL STUDY
4.1 GLOBAL TRENDS IN
FDI FLOWS
4.2 TRENDS IN FDI
FLOWS IN INDIA
4.3 FDI POLICY
FRAMEWORK IN
INDIA
4.4 FDI POLICY: THE
INTERNATIONAL
EXPERIENCE
4.5 CROSS COUNTRY
COMPARISION OF FDI
POLICY

CHAPTER 5 PAGE NO.

5.1 CONCLUSION
5.2 REFERENCE
CHAPTER 1:

1.1: INTRODUCTION

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When the world is running after celebrities, RED CARPET is not an unknown

word for all of us. In this filmy world this Red Carpet presents a Red Color Carpet

on which celebs are walking to enter in this glamorous world. This red carpet is

somehow a dream for some new comers. Because this red carpet is giving that

exposure that they want and gives a chance to come into the limelight. So we can

say this red carpet is a life changing thing for celebrities. Like this with changing

world scenario every corners and aspects are changing with passage of time or we

can say frequently. When the thing comes to economy, businesses and government

have to change its rules and regulations for the shake of ease of doing business.

Changing of rules and regulations means abolition of existing business ethics,

procedures, bureaucratic rules which are creating hurdles for operating some

business activities in present scenario. To run the economy smoothly, the govt. is

now inviting various foreign investors and companies to invest and show interest

in doing business in Indian market. So Red carpet is that life changing tool for new

investors and companies which will give immense opportunities for growth and

development. Whereas Red Tape is an idiom that refers to excessive regulation or

rigid conformity to formal rules that is considered redundant or bureaucratic and

hinders or prevents action or decision-making. It is usually applied to

governments, corporations, and other large organizations. We all know that India

is now 6th largest economy of the world. To become 6th largest economy this Red

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Carpet was somehow the new technique implemented by the government.

1.2: OBJECTIVE OF THE PROJECT

As I mentioned before as this project is based on current situation of Indian

economy, this project will help me and our generation to know about the current

situation regarding the concepts Red Tape and Red Carpet. How these two things

work simultaneously in present situation. Apart from this it will also give idea

about which factors are playing important roles and how govt. is taking vital steps

for the development of economy. Apart from this this study will present us under

mentioned objectives:

1. To study the conceptual data:

Ideas regarding effects of red tape in Indian industry. How red carpet is

creating more opportunities in economy than red tape. How Inviting new

companies and investment opportunities into this creates more employment

and diversity in every aspect.

2. To know the current scenario:

We all know India is developing its economy with a tremendous speed. And

this is all because of taking part of various institutions and organizations.

Our government is working on Red carpet by abolishing Red tape and

looking towards the future goals in where India will achieve a peak position

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in every fields.

3. To know the future certainties by this step:

As I said before and we have seen in recent past that this trending Red

carpet idea is working in increasing not only the Indian Economy but also

World Economy. So as a citizen of this country we are expecting best

outcomes from implementation of this new concept.

4. To know the drawbacks of existing rule:

When India was following the existing rules and procedures, some goals

were achieved and some were yet to achieve. So for those unaccomplished

goals Indian government is now implementing new technique. So from this

we can know that, there must be some drawbacks of existing bureaucratic

rules and regulations which were creating hurdles for accomplishment of

certain goals.

There are some other objectives but these are the prime objectives

on which we should focus and discuss.

1.3: SCOPE OF THE STUDY

Scope of a study represents the boundary within which the project is

prepared and the time period which is represented in that paper. Here the

boundary covered, the world and Indian scenario where Red Tape was

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expanding its effects and for which the global economy was affecting. This

study is mainly focused on economic effects on Indian economy which has

been suffering for many decades. This study puts light on those scenarios

where India is staying behind from every possible opportunities and global

exposure.

1.4: CHAPTER PLAN

This trending and beautiful project consists of 4 chapters. And I am tried to

put all that information which is necessary for this project to enlighten the

whole scenario. In which,

Chapter 1: It deals with certificate of this project submission, declaration,

acknowledgement of this whole topic. Apart from this it includes objectives

of the study, scope of the study.

Chapter 2: This chapter puts light on how India is ignored from this global

exposure and the current implementations towards this global exposure. It

also deals in what are those words before World Economic Forum which

induce other countries to come and invest in this developing economy.

Including these it also puts light on future steps which are going to

implemented for the betterment of this economy.

Chapter 3: Chapter 3 deals in conceptual study. This chapter says what are

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those concepts which represents this Red Tapism and the ways which help

to overcome from this situation. It also explains the global scenarios in short

and 2 diagrams dealt with presidential bureaucracy changes. Apart from

these the challenges faced by different sectors in India. In which ways this

red tape is promoting those are enlightened. And other developing economic

countries which are applying red carpet to improve their economy. India’s

position in every sector like Ease of doing business, human happy index,

infant mortality rate etc.

Chapter 4: This chapter deals in all findings and out comes which are came

after implementing this Red carpet in this economy. This chapters includes

tables of FDI inflows of various countries. Equity FDI inflows to India and

specific limitation to various investment in different sectors. These facts and

figures will tell how this Red Carpet is responding to this stagnant economy.

And 2 graphs presenting the growth rate of GDP in different countries in

various quarters of one year.

Chapter 5: The last chapter is dealing with conclusion of this study and

references, from which this study is conducted.

CHAPTER: 2

LITERATURE REVIEW:

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Red tape has become one of the key research topics in public administration.

Red tape can be described as ‘rules, regulations and procedures that entail a

compliance burden without advancing the legitimate purposes they were intended

to serve. A variety of studies have disentangled red tape from formalization, tested

and retested red tape and compared red tape perceptions between public and

private employees. Despite these important contributions to our understanding of

ineffective rules, the red tape literature is still characterized by methodological

concerns. In line with public administration research in general, red tape scholars

have overwhelmingly relied on cross-sectional survey data. However, a major

drawback of these types of designs is that they do not allow for inferences of cause

and a

handful of experimental studies exist, but their main findings have not been

replicated in other contexts. This is where we seek to make our contribution.

Replication of experimental studies is crucial for moving the field of public

administration forward, as this process strengthens the credibility of research.

And as far as Indian Economy is concerned, India is rigorously implementing

the Red carpet against this Red Tape. 2015 will undoubtedly be known as the year

that the Union Government pulled out all stops to drive manufacturing growth in

the country through Make in India. The big-bang campaign was promoted through

world-class visuals and aggressively marketed by none other than our globe-

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trotting Prime Minister, who has become the country’s biggest brand ambassador.

In recent past prime minister was the first person from India in two decades to

attend the WEF meeting and delivered his speech and clear view on Red Carpet

mechanism in World Economic Forum in Davos. Modi sought to position India in

a leadership role globally and urged leaders to come together to help the world get

rid of its fractures. Some questions are being asked by Narendra Modi like there

are many questions before us that require answer for generations to come. Is the

existing international system promoting fractures and rift in this world? Can we

remove these rifts and distances to make a good shared future? In his speech he

wanted to clear that Many countries are becoming inward focused and

globalisation is shrinking and such tendencies can't be considered lesser risk than

terrorism or climate change. Referring to this year's summit theme, Modi said it

was relevant for him as Indians have always believed in uniting and not dividing

people.

“Mahatma Gandhi had said I don't want doors and windows of my house

to be closed and I want winds of cultures of all countries to come inside but I won't

accept it if that uproots my own culture” with his direct view Narendra Modi

presented how this ‘VasudhaivaKutumbakam’ Is working knowingly and

unknowingly in this world. In his statement he stated, In an interconnected world,

globalisation is losing its lustre. Do global organisations created after the Second

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World War really reflect the aspirations and dreams of mankind today? With

respect to the developing countries there is a very big gap. Everyone talks about

interconnected world but it needs to be admitted that globalisation is losing its

sheen and there is a big gap between the developed and developing world. In his

speech he clearly stated that “We have made it easier to invest in India,

manufacture in India and work in India. We have decided to uproot license and

permit Raj. We are replacing red tape with red carpet”. Stating that hundreds of

reforms have been carried out by the central and state governments, the prime

minister said 1,400 archaic laws that were becoming roadblocks in India's growth

have been removed and the Goods and Services Tax (GST) has been implemented,

among others. He also liked to state Inclusive development is key to all

government programmes, whether it is Jan DhanYojana, BetiBachaoBetiPadhao or

Direct Benefit Transfer through digital infrastructure.

Before ‘Make in India’ comes ‘Permission to Make in India’. And that is why

ease of doing business is so important. But bureaucrats are generally better at

making laws and procedures than changing them. Regulation, however, is costly

— not just for businesses to comply to, but also for governments to check that

compliance.But the same department once in charge of implementing the license

raj — the department of industrial policy and promotion (Dipp) — is now trying to

spark a red-tape revolution. The Dipp is ranking states on their ability to

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implement some 340 pieces of prescribed ‘ease of doing business’ reforms. This

ranking has now come to be accepted as the central government-certified

investment destination league table. And most states are clamouring to be at the

top of it.Here are five suggestions of what India should consider next:

 Have a Single Government: The government machinery seldom works like

a single organism. When it comes to attracting new investment, the CM’s

office or the industries’ department generally organises grand ‘Invest-inso-

and-so’ events where everyone gives a standing ovation to a firework

display of memoranda of understanding (MoUs). A tax or labour department

is not just there to ensure there is no violation happening, but also has to

play a role in promoting businesses and investment.

 Safeguard Decision-Makers: Bureaucrats face tremendous pressure from

various vigilance and oversight bodies. One routinely hears stories of

officers being hauled into court cases on their last days of employment, or

even after retirement. The decisions may have been made in all integrity, but

ended up with wrong consequences, a probability that always exists when it

comes to decision-making. As a result of this witch hunt, everyone in the

system is scared to take any decisions.

 No More ‘Crony’ Ease of Doing Business: It is a common sight in

government offices to have company executives scurry into rooms of

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secretaries and joint secretaries to discuss roadblocks in their businesses.

However, hardly 1% of Indian businesses are in the formal sector. Of that,

only a fraction are large enough to have the contacts and resources to reach

out to the senior level of government.

 Robust Risk Assessment: India’s regulatory mechanism does little to

reward compliance. So, if you are running a chemical plant, you could either

have state-of-the-art certified systems in place, or you could be openly

flouting rules and dumping untreated effluents. Regardless, you are deemed

to be a ‘red’ high-risk establishment, simply because the industry is defined

to a ‘red’ category one. Every business should know why it is getting

inspected in the first place, and what it needs to do to reduce the government

intervention.

 The Government-Business-Consumer Holy Trinity: Not all regulation is

bad. In fact, businesses will admit that well-designed ones serve them well

as they end up raising the overall standards of the industry and inspire

confidence in their consumers.

CHAPTER 3: CONCEPTUAL STUDY

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RED TAPE VS RED CARPET- PART 1:

When we are going to elaborate the total theme of Red Tape, we should know the

small history of this.  The phrase “red tape” in English goes back hundreds of

years. It originally referred to the red ribbons that were used to bind up important

legal documents. By the time of Dickens, the term had become synonymous with

the idea of bureaucratic waste and inertia.

How exactly do we define red tape today? The idiom is ubiquitous, but the

meaning is mushy for most people. Not so for Barry Bozeman, the director of the

Center for Organization Design and Research at Arizona State University and one

of the academic world’s leading experts on the topic. He offers this definition:

“rules, regulations, and procedures that have a compliance burden but do not

achieve the functional objective of the rule.”

As I mentioned before Red tape is all about the complex bureaucratic which was

and also somehow is continuing in this present economic scenario. The

bureaucracy may be far from faultless, but it is hardly the sole culprit in

discouraging foreign investors in investing in India. Its function is to assist state

and central activities and its

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performance is dependent on effective political leadership as well as the legal

framework under which it operates.

According to Admiral in the U.S. Navy, Hyman G. Rickover “If you are going to

sin, sin against God, not the bureaucracy.  God will forgive you but the

bureaucracy won’t”

 According to American conservative political activist, pundit, author and former

ambassador, Alan Keyes “Bureaucracies are inherently anti-democratic.

Bureaucrats derive their power from their position in the structure, not from their

relations with people they are supposed to serve. The people are not masters of the

bureaucracy but its clients”.

If we see this bureaucracy and regulations are more used in developed and

developing countries. We can say this thing is more popular in global scenario.

 3.1:Global Scenario:

 Bureaucracy and excessive regulation, commonly known as red

tape, has a strong influence in any country’s economy. Red tape

includes all sorts of rules, paperwork, permits, taxes, procedures or

requirements which can be crucial when setting up a company or

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doing business in a new market. Even though there may be great

business opportunities, many organizations shy away from the so

called ‘business-unfriendly’ countries.

 According to an article published on the Grant Thornton

International and Emerging Markets blog, the global impact of red

tape on business expansion is now about 30%. The top 10 countries

being strangled by red tape are shown in the article and curiously

enough, except for Greece, which ranks first in the list with a 57%

of bureaucracy pressure on business, the majority of countries that

appear on the list are considered to be emerging economies.

 Russia, India and Brazil, three of the four BRIC countries, are

among the world’s top ten economies and will continue growing

quickly. Such economies are considered attractive opportunities for

investment, but they can also present high levels of risk to anyone

doing business in there.

 If we analyse the case of Brazil, for instance, we can see that

bureaucracy can indeed be a challenge for anyone doing business

there. Brazil ranks second in the list, with a score of 50% in terms

of bureaucracy pressure on business. It was ranked 126th out of

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183 countries on the last World Bank’s Ease of Doing Business

report.

 Reports suggest that about 17% of Brazilian GDP is lost in

bureaucracy, and it takes from 13 to 17 procedures and 169 days on

average to start a company in the country, but there are many cases

of companies that after two years were not still able to legally

operate. In fact, approximately 40% of Brazilian start-up

businesses do not survive more than two years according to data

published last year by the Brazil’s Government Research Institute

and many foreign companies have failed after having invested huge

amounts of money in Brazil.

 A society’s need to create rules and processes, which can often

result in heavy bureaucracy, is culturally driven. When people in a

culture find risk or uncertainty uncomfortable, they usually define

rules or policies to ensure that there is no ambiguity. Interculturalist

Geert Hofstede analysed this component of culture and called it

Uncertainty Avoidance. Cultures who feel a need to control things

to avoid any risk or vagueness are often classified as having a low

tolerance to uncertainty avoidance.

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 Countries who tend to be on this end of the scale, and who

therefore are often perceived to have a lot of red tape, include

Russia, Argentina Brazil, Poland and Greece. People in these

countries do not like to be rushed into making decisions and think

that detailed and rigid processes makes the world a better and more

secure place. Bureaucracy may impede companies to take

appropriate actions to achieve organizational goals or adapt on the

changing market, but it is deeply rooted in some cultures as a

measure to guarantee equality. How things are run in other

countries may cause frustration and failure, promote stereotypes

and will undoubtedly make building trust and enhancing

interpersonal relationships more difficult.

While talking about this red tapism and red carpet in this present global scenario It

may well be the biggest bogeyman in business—bigger, perhaps, than even taxes:

We’re talking, of course, about red tape. The idea that burdensome and overly

complicated government regulation is strangling growth is almost as old as

commerce itself. But right now the hue and cry from the business community is

louder than at just about any time in recent memory.

Concern about regulation is soaring among executives. In a recent survey by

Deloitte, North American chief financial officers named new, burdensome

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regulation as the No. 2 threat to their business, behind only the possibility of a

recession. When the National Federation of Independent Business, which

represents 325,000 small U.S. companies, conducted its quadrennial survey earlier

this year, its members identified “unreasonable government regulations” as the

second-biggest threat, after rising health care costs. And for a fourth year in a row,

the CEOs surveyed by the Business Roundtable for its annual economic outlook

cited regulation as the top cost pressure facing their companies.

Red tape has emerged as a major talking point in the presidential campaign—with

each candidate approaching the topic in characteristic fashion. Hillary Clinton has

promised to be the “small-business President” and has wonkishly outlined plans to

cut red tape by streamlining the startup process for entrepreneurs and expanding

access to credit through community banks and credit unions.

Donald Trump, meanwhile, has taken a more shoot-from-the-hip approach. The

Republican nominee has vowed to roll back many of the new regulations enacted

under President Obama, including environmental standards designed to address

climate change. Trump’s campaign has proposed a 10% overall reduction in

regulations. But the candidate himself has at times suggested a more sweeping

overhaul. On the same day that a videotape from 2005 surfaced showing Trump

bragging about his aggressive sexual behavior—a revelation that sent his poll

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numbers crashing—the nominee cavalierly told a crowd at a town hall in New

Hampshire that he would eliminate the majority of federal agency regulations if

elected. “I would say 70% of regulations can go,” Trump said. “It’s just stopping

businesses from growing.”

3.2: POLITICAL STREAMLINE:

When the election was about to happen both the candidates Hilary Clinton and

Donald Trump had their words before the general public of America and induced

them to believe on them and some words were also for this complex bureaucratic: -

Hillary Clinton

1. Streamline the licensing process to make it cheaper and faster, and

standardize licensing rules across states to make it easier for small-business

owners to operate in different states.

2. Ease the way for credit unions and small banks to lend to small businesses,

in part by incentivizing state and local governments to cut red tape—and

making the feds more responsive to questions about regulations.

3. Simplify the eligibility requirements for small businesses seeking a tax

credit through the Affordable Care Act to offer coverage to employees.

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Donald Trump

1. Repeal both the Affordable Care Act and the Dodd-Frank package of

regulations approved as a response to the financial crisis.

2. Dramatically scale back rules on the energy industry to open federal lands

and offshore areas to oil and gas exploration, issue new coal-mining leases on

federal land, remove rules protecting waterways and wetlands from industry,

and scotch the Obama administration’s plan to curb greenhouse-gas emissions

from power plants.

3. Delay all new regulations in order to conduct a review of those already on

the books.

Red tape is clearly a major source of friction—but is it really strangling business?

The answer is less obvious than it may seem. For a phenomenon that’s seemingly

ever present, red tape can be harder to pinpoint than you might think. Weighing the

costs of regulations against their benefits is not always a straightforward task. How

do you tweak your model, for example, to account for slowing down a global-

warming Armageddon? Or fully account for the stability—and transparency—that

keep your financial markets healthy?

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We can certainly intuit the drag of bureaucracy—in the increasingly long and

expensive process of developing new medications, for instance. And there are

endless examples of how, in isolation, red tape appears to cost us plenty.

Infrastructure projects that get delayed for years—with tens of thousands of pages

25
of environmental reviews and permits—resulting in millions in extra costs.

26
Companies are certainly more than capable of creating their own bureaucracies,

and do. But when business leaders complain about red tape, they’re almost always

griping about government regulations.

Lately, much of that grumbling has been directed toward President Obama. There

is growing frustration in the business community about the amount and ambitious

scope of new federal regulations being produced by his administration. In the first

installment of a six-part look back at his presidency, the New York Times, hardly a

stalwart of conservatism, called Obama “the Regulator in Chief” and asserted that

he will leave office as “one of the most prolific authors of major regulations in

presidential history.”

The numbers bear that out. A total of 560 major regulations—those having an

economic impact of $100 million or more—were published in the first seven years

of the Obama administration, according the George Washington University

Regulatory Studies Center, compared with 494 for his predecessor, George W.

Bush. And the number of new rules passed typically spikes in a President’s final

year in office.

Two major new sources of regulations under Obama were the landmark laws

enacted in 2010: The Dodd-Frank bill, a massive response to the financial crisis

27
of 2008, and Obama’s signature Affordable Care Act, the contentious law that

brought health care to millions of uninsured Americans. (The law firm Davis Polk

calculated last year that the more than 22,000 pages of rule releases related to

Dodd-Frank added up to more than 34 copies of Moby Dick.) But with Congress

unable to pass much of anything in recent years, the President has empowered his

executive branch to pursue policy goals ranging from the battle against climate

28
change to improving workplace safety.

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The numbers bear that out. A total of 560 major regulations—those having an

economic impact of $100 million or more—were published in the first seven years

of the Obama administration, according the George Washington University

Regulatory Studies Center, compared with 494 for his predecessor, George W.

30
Bush. And the number of new rules passed typically spikes in a President’s final

year in office.

3.3: RED CARPET IN OTHER COUNTRIES :

Apart from these strong economic countries there are other countries which

are still developing and somehow this red carpet is playing a major role in

developing their economy. And these countries are now at the best position in

ease of doing index, happy index, human capital index etc. Some of the

examples are:

 Rolling out red carpet in IT industry in Bhutan came into light when

Bhutanese Prime Minister, LyonchhenTsheringTobgay visited India and told

how Bhutan is putting efforts in ambitious development of IT industry. Now

Bhutan would pursue a programme to build on its natural foundation and

treat the path of modernization, led by IT. He assured India to welcome

Indian IT companies to come and set up their business there. And also give

best options and incentives to do business. By which India will feel the

enthusiasm of Bhutan.

 Apart from this China is focusing on red carpet principally on foreign

investment. As we all see India is totally demanding for red carpet and the

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central government is all set to implement this. In the new feature Innovation

and high end manufacturing India is going to join China according to the

prime minister of china. In China so much new industries are developing and

establishing so India will show interest on these companies and organization

to invest in Indian market.

 3.4 INDIAN SCENARIO:

Political corruption has always influenced the quality of

bureaucracy more so in countries freed from colonial rule because of social

and economic factors. As a result, political and economic considerations

started affecting bureaucratic governance in course of time.  On the one

hand, liberal European economists were alarmed at the proportions of the

State bureaucracy and its increased intervention in the economic sphere

destroying free enterprise and democratic institutions; there are those who

attribute increasing bureaucratization and decline of democracy not to the

state’s interference but to the internal dynamics of the capitalist economic

system.  

In a typically bureaucratic administration, the arbitrariness of the rulers is

believed to be curtailed by the existence of legal norms and regulations. For

instance, the tenure of a bureaucrat is often pre-determined by rules and hence the

bureaucrat cannot be dismissed due to whims and fancies of the superior.

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Similarly, an ideal bureaucrat can refuse to obey orders that go against established

rules and standards.  In so far as general policy making is concerned, the

bureaucrat is expected to be a mere tool that should put aside his own preferences

while executing the orders in a neutral manner. The delicate blend of professional

autonomy with political neutrality in bureaucracy is indeed an ideal (and its chief

merit) but ironically does not often exist in actual practice. 

A mature and well-organised civil service is high on the agenda in the

list of needs of the rulers coming out of the shackles of colonialism and embarking

upon quick economic development because in many of these countries,

entrepreneurial spirit is weak, private capital is scarce and standards of

management inadequate. In such circumstances, governments opted for a system

where the civil service could play a larger catalyst role in promoting industry, trade

and commerce. Ironically, in actual practice, bureaucracy in these nations turned

out to be synonymous with red tape, inefficiency, nepotism and corruption. 

Turning to the conditions in India, the existing bureaucracy owes its

beginning to the British rule. Prior to the British rule, the bureaucracy was mainly

confined to the requirements of small kingdoms and feudal chiefs. There is

evidence of a reasonably efficient bureaucracy during the Maurya rule as is seen

from Kautilya’s Arthasastra. Kautilya refers to the existence of bureaucracy with

fixed tenure and official accommodation for administrators, decentralization of

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powers and a large network of intelligence system with enforcement machinery at

District levels.  According to Kautilya, the State comprises of eight elements-

King, Minister, Country, fort, treasury, army, friend and enemy. And State's prime

function was to maintain law and order, ruthlessly punishing wrong doers and

protecting subjects.  However, after the Maurya dynasty, there was no centralised

administration in large parts of India due to the emergence of small kingdoms over

a period. Although some of these rulers were enlightened, cultured and educated in

certain parts of India where bureaucracy performed diligently and efficiently (e.g.,

Baroda, Mysore, Jaipur, Pune and Trivandrum), there were many other regions

where feudal culture prevailed, which was not public friendly. Thereafter, with the

Moghul rule and subsequent British colonial rule the purity of public

administration seems to have had a nose-dive with a feudal bias. 

When the East India Company started playing a role in Indian administration, its

representatives like Robert Clive and Warren Hastings have themselves admitted

to looting the native kings by viciously interfering in their administration. The

British Government, after taking over the East India Company, initially brought

civil servants from the UK and later realised the need to develop bureaucracy

locally.  Since the focus of attention of the British rule was only law and order,

bureaucracy was not geared to meet the needs of economic development and social

justice. Post-independence, the government reorganized the civil service however

34
borrowing heavily from the British model.  Further, in order to give representation

to various classes of citizenry merit was not always the criterion in recruitment and

promotion. While this is justifiable for a country aspiring for social equality

especially because of the reservations provided for in the Constitution for socially

backward persons, the top echelons of service did suffer from the consequences of

such policy often twisted for political gains.

The government failed to take adequate steps to make good this deficiency by

proper periodical theoretical and on-the job training, along with inculcating ethical

values through senior officers.  Moreover, the distance between the civil servants

and the people especially in the rural areas was dominated by a feudal attitude both

by senior officers and the new young entrants to the civil service.  With the

increased activities of the State due to developmental needs and the consequent

ballooning of the civil service by large number of entrants, bureaucracy in India

turned out to be a huge white elephant both in terms of increasing expenditure and

inadequate output. It is not that the government was not aware of the inadequacy of

the bureaucracy. A number of Committees and Commissions were appointed

periodically more as a ritual to recommend measures for improving the civil

service and yet many of these recommendations went unnoticed by the various

governments. Commissions to make public administration fair, transparent and

35
accountable without any political interference.  The Supreme Court delivered its

judgement on 31 October, 2013 to the following effect.

(i) Fixed tenure of bureaucrats will promote professionalism, efficiency and good

governance 

(ii) Much of the deterioration in the functioning of bureaucracy is due to political

interference

(iii)  The Centre and state governments to pass an order within three months on

giving fixed tenure to civil servants

(iv) Top bureaucrats should record in writing the oral instruction of political

bosses on files so as not to be hounded later on for a particular decision. Such

recording of political instructions by bureaucrats will also help in promoting

transparency and will allow general public to access correct information.

The dictionary meaning of Red Carpet is “a special treatment or hospitality”.  Red

Carpet in this context is used to mean a liberal approach of the Government to

investors so as to incentivise investment resulting in employment and growth.

When a Government promises Red Carpet to investors, it is obviously keen to

simplify procedures and processes to promote investment.  It would therefore

36
follow if major deficiencies in a functioning bureaucracy such as inefficiency,

incompetence, indifference and injustice can be surgically eliminated, such a

bureaucracy will automatically usher in Red Carpet for policy-making.

This also leads us to the question whether Red Carpet means total absence of any

restriction and/or regulation.  It has to be borne in mind that in most of the

developing economies, total absence of restriction or regulation of business entities

would normally result in chaotic consequence such as economic inequality,

environmental hazards and social conflicts.  It is therefore desirable that in the

context of developing countries especially in Asia and Africa, Red Carpet to

investors has to go along with reasonable and adequate regulations so as to avoid

adverse socio-economic consequences, whether you call it Red Tape or otherwise.

India can boast of having everything- human and material resources, a vast market,

a reservoir of scientific and technological expertise, substantial entrepreneurial

talent and management competence.  In spite of this being so, the country suffers

from deficiencies in the quality of governance probably due to historical and

attitudinal factors.  While governance means different things to different people

and has many dimensions, it can be said without any hesitation that the fruits of

freedom and development have really not reached all the poorer sections of

society. It is therefore, necessary that immediate action should be taken to reform

public administration with a clear, coherent and comprehensive roadmap. The root

37
cause of poor governance in India lies in the design of the democratic

administration and leadership deficiencies of political and administrative masters.

Hence, any attempt to improve the quality of governance calls for a totally new

approach to public administration by which the legal framework is suitably

modified to make it unambiguous and people friendly.

3.5:SOME EXAMPLES OF AFFECTED INDUSTRIES DUE TO RED TAPE :

RED TAPE AS A HURDLE FOR EDUCATION:

Taking a note of the emerging trend of educational institutions being sent for trial

on the basis of presumptions or slight procedural oversight in grant of approval, a

CBI court has said it will be unwise to look at every private educational institute

with suspicion; it will be bad for the education system of the country.The court

said it would be wise to have clear guidelines and few formalities to give approval

to institutes. The CBI court presided over by Special CBI Judge SwarnaKanta

Sharma pointed out that institutions educating masses in remote areas would be

dissuaded from doing their job if small technicalities and procedural errors in grant

of approval, which can be termed as procedural oversight, are termed as corrupt

practices.

Also considering the extensive documentation work and red-tapism in the

education and administrative system, the court said: “Let us do away with the

38
perception of an Indian education or administrative system where red-tapism

commonly known as “sarkarikaam” or “sarkari way” of working makes people

fearful of either applying for new institutes or filing up unnecessary documents or

look for corrupt means for fear of rejection.”

It is clearly understood that Red-tapism, too much of documentation, duplicity

of documents, no clear guidelines and the attitude of looking with suspicion at

every highly placed officer and approval granted to run the course is bad for the

education system of the country.

ENTREPRENEURS VS RED TAPE:

Regulatory roadblocks are emerging as the biggest challenge for scores of

entrepreneurs catering to the growing demand for innovative services from Indian

consumers. These ventures that deliver a range of products from education,

healthcare and financial services are finding themselves mired in a maze of

byzantine laws and multiple compliances required across states. “Regulatory

cholesterol is very high in India, which is becoming toxic to the growth of

entrepreneurship,” says Manish Sabharwal, co-founder of temporary staffing firm,

TeamLease. The Bangalore-based company has hired a battery of 80 lawyers to

handle the various licences required to manage a portfolio of 1,200 clients. At

present with 90,000 people on its rolls, Team Lease grosses a revenue of Rs 1300

39
crore. 

Chaturvedi and Sabharwal’s frustrations are similar to those borne by many other

entrepreneurs in the country, who deal with corrupt inspectors, archaic labour laws,

and a lack of clarity on regulation and taxation issues. Many of these ventures

breaking new ground by using technology to deliver services ranging from mobile

payments to online insurance and data services face inordinate delays in obtaining

to start-up.

AnandShrivastav who founded Beam Money had to wait for five years to get a

license to start his digital payments business. The Delhi-based venture provides

mobile wallets to pay mobile or direct-to-home television services bills or to shop

online. It counts ICICI Bank’s m-pesa and Airtel Money as similar

services. Experts are of the view that a lack of regulatory clarity is what leads to

entrepreneurs being caught in a quagmire. “Government should play the role of a

facilitator not a regulator of entrepreneurship.

If we look at the number of days to start a business in India, it takes 27 days.

Whereas other countries like Canada takes 5days, USA takes 6 days, UK takes 13

days, Singapore takes 3 days and New Zealand takes only one day to start a

business. From this we can get the basic idea that how complex is our democratic

and bureaucracy system.

RED TAPE CHALLENGES IN SMEs:

40
Fat bundles of paperwork, countless certificates, long hours of waiting, irritating

haggling with unresponsive officials . . . whenever our small entrepreneurs talk

about public bureaucracy involved in owning and running a small business, they

spew venom. There are a myriad of inconceivable obstacles at every step - right

from registering a business or getting an electricity connection to paying taxes and

getting loans.

A recent report on "Doing Business 2013, Smarter Regulations for Small and

Medium-Size Enterprises" published by the World Bank and the International

Finance Corporation (IFC), gives the same picture. In the list, India ranks very low

at 132th position out of 185 economies surveyed, faring particularly poorly on

some of the sub-indices such as starting a business (173), dealing with construction

permits (182), getting electricity (105), paying taxes (152), trading across borders

(127), enforcing contracts (184), resolving insolvency (116).

The report adds that Indian SMEs have to comply with 12 procedures that take on

average 27 days to start a business. Similarly, dealing with construction permits

involves 34 procedures and a 196-day waiting period, getting electricity involves 7

procedures and a 67-day waiting period, registering property requires 5 procedures

and a 44-day waiting period. For exports, an SME needs to collect 7 types of

document, including Bill of Lading, Certificate of Origin, Commercial invoice,

Foreign exchange control form, Inspection report, Packing list, Shipping Bill,
41
Technical standard certificate, and Terminal handling receipts -- all these requiring

a total of 16 days on average.Beyond doubt, such a level of bureaucracy and red

tape is a real headache for our SMEs. Small business owners, with their weak

financial muscles and limited hiring power, have to keep themselves busy as a bee

in handling a lot of daily chores at office and keeping a close eye on every single

aspect of their business.

3.6: GOVERNMENTAL INITIATIVES:

While bringing about the new approach in public administration, it has to be borne

in mind that too much of control by government in the name of regulation will only

result in obstacles and irritants in governance. Conversely, too much of freedom in

economic activities in the name of liberalism will only result in chaos and

conflicts. There is therefore a need for a healthy blend of regulation and freedom.

No doubt professional and pragmatic experts with less bureaucratic approach

should man these institutional mechanisms.

To meet this daunting objective, the following broad suggestions are worth

consideration to usher in Red Carpet without much of Red Tape:

(A) Measures to tackle corruption:

i)The starting point of corruption in governance is political corruption. Political

corruption thrives mainly because of donations to political parties leads to nexus

42
between donors and rulers thereby tainting policy decisions of the government.

Although the law permits only profit making corporates to make donations to

political parties within certain prescribed limits, it is a well-known fact that

corporates and non-corporates donate funds to political parties both in power and

out of power violating the law in order to curry favour with the parties when they

come to power.  These funds are largely used for meeting ever increasing election

expenses.  Perhaps a better alternative would be to constitute a National Election

Fund on the lines of Prime Minister’s Relief Fund to which donations can be made

by all taxpayers including corporates with 100% tax exemption. As result, the

existing obnoxious nexus between the corporates and non-corporate businesses to

political parties can be snapped. 

ii)The approval to be given by government for starting any business operation both

at the Centre and the States should only be through a single-window system and

preferably online.  The practice of promoters of new enterprises personally visiting

the Ministers and officials should be completely avoided.  Only Trade

Associations, Chambers of Commerce etc., alone should meet Ministers/officials

to represent the grievances of industry/trade. 

iii)There should be an Ombudsman with adequate powers to entertain public

grievances in respect of each Ministry/cluster of ministries. The Ombudsman and

the ministry concerned should be statutorily mandated to reply grievances within a

43
time frame of say a month or two depending upon the complexity of the issues

involved.   The Ombudsman should be required to submit an annual report on the

grievances received and action taken which should be placed on the table of the

legislature at the Centre/State.

(B) Administrative Reforms:

i)Government should ordinarily move out of service industry and if it is necessary

to have some control, Government can be a dominant partner in the outsourced

entity.  (e.g.) Government should corporatize Railways, Airlines, etc.  There is no

need for a huge bureaucracy running these services.  It can be run on a PPP

(Private Public Partnership) basis with Government retaining 51% control. Each of

these units should be required to ensure that it functions as a self-sustaining

economic unit with depending on funds from the government.

ii)Already we have public sector institutions which are carrying out some of the

requirements of Government. For example, NBCC (National Building

Construction Corporation) is a public undertaking intended to do construction

activities. Similarly in some States there are public undertakings for undertaking

construction activities.  This being so, is it not possible to wind up the Ministry of

Public Works completely and entrust all government constructions to this

44
organization with of course a suitable mechanism just to monitor and regulate the

undertaking under Ministry of Programme Implementation.

iii)Similarly, most of the public hospitals and clinics are run by government either

by the Centre or State.  The hospitals can be corporatised again on a PPP basis. In

fact, government should promote more hospitals with adequate facilities to reduce

the existing congestion in government hospitals.  As far as outpatient treatment is

concerned, all the government servants and senior citizens can be covered by an

appropriate Insurance scheme to be designed by the public sector general insurance

companies. If this is implemented, the present over-sized Central Government

Health Scheme can be substantially reduced. iv)The allocation of powers between

the Centre, State and Local Body institutions in regard to maintenance work within

the territorial jurisdiction should be mutually exclusive.  For example, the

maintenance of roads/libraries etc., in villages and towns should be handed over to

the village panchayat and corporations with suitable financial allocations.  The

local body institutions should also be empowered to raise funds within a broad

limit for creating public goods such as roads, libraries, stadia etc., the central

government providing necessary guarantee.

v)Another area of economy in administration is to discourage domestic and foreign

travels by resorting to Video-conferencing to the maximum extent so as to save

time and cost.

45
(C) Police Reforms:

Another area requiring urgent attention relates to effective enforcement of Law and

Order. This being the concern mainly with the State Government the present state

of affairs in many States is highly unsatisfactory. In most of the States, the State

Police is controlled   by the State Government often for political purposes with the

result that the people have very little faith in police as an instrument of fair play

and equality before law.  In fact, this led to the formation of Central Para-Military

forces such as CISF, BSF, CRPF etc.  The Police Commission Report submitted

sometime in the 70’s is still languishing and crying for implementation

notwithstanding that the matter of implementing their recommendations as to a

large extent received judicial approval by the apex court.

D) Taxation Reforms:

(a)The present system of taxation of business enterprises as well as individuals

needs to be completely revisited.  For example, the system of flat final tax on

Interest, Commission, and salary income could be considered to simplify the tax

administration thereby reducing harassment to taxpayers.  These items can be

taxed at a flat rate on a gross basis with a two-tier schedule: The rate of tax can be
46
at 10% uptoRs.10,000/ and 20% above Rs.10,000/ on the gross receipts.  Only

those having income other than these items need to file tax returns.  Such a step

will reduce the administrative cost and compliance cost apart from reducing

manpower in tax administration.

(b)The existing Service Tax can be rationalised. I see no reason why a separate

Commissionerate is required to implement this tax.  Actually, this is an additional

Income Tax on people rendering various services. This is very much a Direct Tax.  

This tax originally started with a small rate has now crossed 12% which is an

additional burden on all Income Tax payers providing services.

(c)At present, taxes are collected by various specified banks through their

branches.  Perhaps there can be a centralized dedicated Tax branch in each District

Headquarters to which remittances can be made by tax payers from any branch

through NEFT.  The advantage of this method is that reconciliation of tax

payments can be made by the tax administration more easily. 

(E) Corporate Law Reforms:

(i)There are number of companies and banks under liquidation where the winding

up proceedings are pending for long period with the High Court who do not have

wherewithal to dispose of these proceedings. Some companies are under

liquidation for three to four decades where the shareholders of the companies are

47
still to get dividends from sale of large assets owned by such companies.  In some

cases the shareholders would have died by now with the result the legal heirs may

not even know about their dues.  Huge assets such as land, machinery, bank

deposits etc., are locked up without any productive purpose.  These idle assets need

to be put into proper use. 

(ii)In India, there is no Corporate Restructuring Authority to nurse back companies

in distress. For example, in the case of Satyam Limited the government through

Company Law Board replaced the Board in order to save large number of

employees from losing their jobs.  The same thing can be done in many cases.

Company Law Board and the BIFR who have legal authority to do this do not have

the necessary focus on nursing such companies.

(iii)Similarly, the rules relating to Asset Reconstruction companies which are

under the regulation of RBI need to be liberalised to enable the ARCs to take over

the NPAs of the banks.

(iv)The Companies’ Act 2013 contains number of provisions relating to Private

Limited companies and wholly owned subsidiaries.  For example, if the parent

company and the wholly owned subsidiary companies are to merge there is a long

procedural legal requirement which seems to be unwarranted.  Such provisions

need to be deleted as there is no impact on any outside shareholder/stakeholder.

48
(F) Judicial Reforms: 

A number of suggestions have been made by various bodies including the Law

Commission for improving judicial administration. Although many foreign

investors appreciate the rule of law prevailing in India unlike many other

developing countries, they have strong reservations due to judicial delays.  A

commercial organisation cannot carry on business with uncertainty in matters of

litigation.  It is therefore imperative that there is a time limit for completing

litigation proceedings both in civil and criminal areas.  The present system of

granting adjournments without any limitation is casting a slur on our judicial

system.  This needs to be remedied without any delay if we want to attract

investors both foreign and domestic. 

We have recently been basking in the knowledge that India has fared well in the

World Bank’s latest Ease of Doing Business (EODB) report. For the second year

running, our country was recognised among the best performing nations when it

came to reforms in the business environment. This year India moved 23 places up

the rankings chart, from 100 to 77. The greatest improvements have been recorded

in ‘dealing with construction permits’ where the country jumped 129 places to

reach 52, and ‘trading across borders’ where India has moved 66 places to reach

80.

49
CHAPTER :4

ANALYTICAL STUDY:

Countries around the globe compete fiercely to attract foreign direct investment

(FDI). Policymakers believe that FDI can contribute to a faster economic growth

by bringing additional capital,creating jobs, and transferring new technologies and

know-how across international borders.Recent empirical evidence also suggests

that FDI may lead to positive productivity spillovers tolocal firms, particularly in

50
the supplying industries.1 Given these potential benefits of FDIinflows, an

important question for policy makers is how to attract foreign investors.

This study aims to rigorously assess the effectiveness of investment promotion

activities byexamining three questions: (i) does investment promotion lead to

higher FDI inflows? (ii) is thereevidence that information provision is an important

channel through which investment promotionworks? (iii) how do the costs of

investment promotion compare to the benefits it brings?

FDI inflows to India remained sluggish, when global FDI flows to EMEs had

recovered in 2010-11, despite sound domestic economic performance ahead of

global recovery. The paper gathers evidence through a panel exercise that actual

FDI to India during the year 2010-11 fell short of its potential level (reflecting

underlying macroeconomic parameters) partly on account of amplification of

policy uncertainty as measured through Kauffmann’s Index.

FDI inflows to India witnessed significant moderation in 2010-11 while other

EMEs in Asia and Latin America received large inflows. This had raised concerns

in the wake of widening current account deficit in India beyond the perceived

sustainable level of 3.0 per cent of GDP during April-December 2010. This also

assumes significance as FDI is generally known to be the most stable component

of capital flows needed to finance the current account deficit. Though the liberal

51
policy stance and strong economic fundamentals appear to have driven the steep

rise in FDI flows in India over past one decade and sustained their momentum

even during the period of global economic crisis (2008-09 and 2009-10),the

subsequent moderation in investment flows despite faster recovery from the crisis

period appears somewhat inexplicable. Survey of empirical literature and analysis

presented in the paper seems to suggest that these divergent trends in FDI flows

could be the result of certain institutional factors that dampened the

investors’sentiments despite continued strength of economic fundamentals.

This paper has been organised as follows: Section 1 presents trends in global

investment flows with particular focus on EMEs and India. Section 2 traces the

evolution of India’s FDI policy framework, followed by cross-country experience

reflecting on India’s FDI policy vis-à-vis that of select EMEs. Section 3 deals with

plausible explanations of relative slowdown in FDI flows to India in 2010-11 and

arrives at an econometric evidence using panel estimation.

Trends in FDI Inflows

Widening growth differential across economies and gradual opening up of capital

accounts in the emerging world resulted in a steep rise in cross border investment

flows during the past two decades. This section briefly presents the recent trends in

global capital flows particularly to emerging economies including India.

52
4.1: Global Trends in FDI Inflows

During the period subsequent to dotcom burst, there has been an unprecedented

rise in the cross-border flows and this exuberance was sustained until the

occurrence of global financial crisis in the year 2008-09. Between 2003 and 2007,

global FDI flows grew nearly four -fold and flows to EMEs during this period,

grew by about three-fold. After reaching a peak of US$ 2.1 trillion in 2007, global

FDI flows witnessed significant moderation over the next two years to touch US$

1.1 trillion in 2009, following the global financial crisis. On the other hand, FDI

flows to developing countries increased from US$ 565 billion in 2007 to US$ 630

billion in 2008 before moderating to US$ 478 billion in 2009.

The decline in global FDI during 2009 was mainly attributed to subdued cross

border merger and acquisition (M&A) activities and weaker return prospects for

foreign affiliates, which adversely impacted equity investments as well as

reinvested earnings. According to UNCTAD, decline in M&A activities occurred

as the turmoil in stock markets obscured the price signals upon which M&As rely.

There was a decline in the number of green field investment cases as well,

particularly those related to business and financial services.As the world economic

recovery continued to be uncertain and fragile, global FDI flows remained stagnant

at US $ 1.1 trillion in 2010. According to UNCTAD’s Global Investment Trends

Monitor (released on January 17, 2011), although global FDI flows at aggregate
53
level remained stagnant, they showed an uneven pattern across regions – while it

contracted further in advanced economies by about 7 per cent, FDI flows recovered

by almost 10 per cent in case of developing economies as a group driven by strong

rebound in FDI flows in many countries of Latin America and Asia.

The share of developing countries, which now constitutes over 50 per cent in total

FDI inflows, may increase further on the back of strong growth prospects.

However, currency volatility, sovereign debt problems and potential protectionist

policies may pose some risks to this positive outlook. Nonetheless, according to

the Institute of International Finance (January 2011), net FDI flows to EMEs was

projected to increase by over 11 per cent in 2011. FDI flows into select countries

are given in Table 1.

Table 1 : Countries with Higher Estimated Level of FDI Inflows than India in 2010

  Amount (US$ billion) Variation (Percent)

2010 2010
  2007 2008 2009 2008 2009
(Estimates) (Estimates)
World 2100.0 1770.9 1114.2 1122.0 -15.7 -37.1 0.7
Developed Economies 1444.1 1018.3 565.9 526.6 -29.5 -44.4 -6.9
United States 266.0 324.6 129.9 186.1 22.0 -60.0 43.3
France 96.2 62.3 59.6 57.4 -35.2 -4.3 -3.7
Belgium 118.4 110.0 33.8 50.5 -7.1 -69.3 49.4
United Kingdom 186.4 91.5 45.7 46.2 -50.9 -50.1 1.1
Germany 76.5 24.4 35.6 34.4 -68.1 45.9 -3.4
Developing Economies 564.9 630.0 478.3 524.8 11.5 -24.1 9.7
China 83.5 108.3 95.0 101.0 29.7 -12.3 6.3
Hong Kong 54.3 59.6 48.4 62.6 9.8 -18.8 29.3
Russian Federation 55.1 75.5 38.7 39.7 37.0 -48.7 2.6

54
Singapore 35.8 10.9 16.8 37.4 -69.6 54.1 122.6
Saudi Arabia 22.8 38.2 35.5 - 67.5 -7.1 -
Brazil 34.6 45.1 25.9 30.2 30.3 -42.6 16.6
India 25.0 40.4 34.6 23.7 61.6 -14.4 -31.5
Source:World Investment Report, 2010 and Global Investment Trends Monitor, UNCTAD.

4.2: Trends in FDI Inflows to India

With the tripling of the FDI flows to EMEs during the pre-crisis period of the

2000s, India also received large FDI inflows in line with its robust domestic

economic performance. The attractiveness of India as a preferred investment

destination could be ascertained from the large increase in FDI inflows to India,

which rose from around US$ 6 billion in 2001-02 to almost US$ 38 billion in

2008-09. The significant increase in FDI inflows to India reflected the impact of

liberalisation of the economy since the early 1990s as well as gradual opening up

of the capital account. As part of the capital account liberalisation, FDI was

gradually allowed in almost all sectors, except a few on grounds of strategic

importance, subject to compliance of sector specific rules and regulations. The

large and stable FDI flows also increasingly financed the current account deficit

over the period. During the recent global crisis, when there was a significant

deceleration in global FDI flows during 2009-10, the decline in FDI flows to India

was relatively moderate reflecting robust equity flows on the back of strong

rebound in domestic growth ahead of global recovery and steady reinvested

55
earnings (with a share of almost 25 per cent) reflecting better profitability of

foreign companies in India. However, when there had been some recovery in

global FDI flows, especially driven by flows to Asian EMEs, during 2010-11,

gross FDI equity inflows to India witnessed significant moderation. Gross equity

FDI flows to India moderated to US$ 20.3 billion during 2010-11 from US$ 27.1

billion in the preceding year.

This tables 2 shows Equity FDI inflows to India in various sectors.

Table 2: Equity FDI Inflows to India

(Percent)
Sectors 2006-07 2007-08 2008-09 2009-10 2010-11
Sectoral shares (Percent)
Manufactures 17.6 19.2 21.0 22.9 32.1
Services 56.9 41.2 45.1 32.8 30.1
Construction, Real estate and mining 15.5 22.4 18.6 26.6 17.6
Others 9.9 17.2 15.2 17.7 20.1
Total 100.0 100.0 100.0 100.0 100.0
Equity Inflows (US$ billion)
Manufactures 1.6 3.7 4.8 5.1 4.8
Services 5.3 8.0 10.2 7.4 4.5
Construction, Real estate and mining 1.4 4.3 4.2 6.0 2.6

56
Others 0.9 3.3 3.4 4.0 3.0
Total Equity FDI 9.3 19.4 22.7 22.5 14.9
From a sectoral perspective, FDI in India mainly flowed into services sector (with

an average share of 41 per cent in the past five years) followed by manufacturing

(around 23 per cent) and mainly routed through Mauritius (with an average share

of 43 per cent in the past five years) followed by Singapore (around 11 per cent).

However, the share of services declined over the years from almost 57 per cent in

2006-07 to about 30 per cent in 2010-11, while the shares of manufacturing, and

‘others’ largely comprising ‘electricity and other power generation’ increased over

the same period (Table 2). Sectoral information on the recent trends in FDI flows

to India 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’. Manufacturing, which has been

the largest recipient of FDI in India, has also witnessed some moderation (Table 2).

FDI Policy Framework

Policy regime is one of the key factors driving investment flows to a country.

Apart from underlying macro fundamentals, ability of a nation to attract foreign

investment essentially depends upon its policy regime - whether it promotes or

restrains the foreign investment flows. This section undertakes a review of India’s

FDI policy framework and makes a comparison of India’s policy vis-à-vis that of

select EMEs.
57
4.3: FDI Policy Framework in India

There has been a sea change in India’s approach to foreign investment from the

early 1990s when it began structural economic reforms encompassing almost all

the sectors of the economy.

Pre-Liberalisation Period

Historically, India had followed an extremely cautious and selective approach

while formulating FDI policy in view of the dominance of ‘import-substitution

strategy’ of industrialisation. With the objective of becoming ‘self-reliant’, there

was a dual nature of policy intention – FDI through foreign collaboration was

welcomed in the areas of high technology and high priorities to build national

capability and discouraged in low technology areas to protect and nurture domestic

industries. The regulatory framework was consolidated through the enactment of

Foreign Exchange Regulation Act (FERA), 1973 wherein foreign equity holding in

a joint venture was allowed only up to 40 per cent. Subsequently, various

exemptions were extended to foreign companies engaged in export oriented

businesses and high technology and high priority areas including allowing equity

holdings of over 40 per cent.The announcements of Industrial Policy (1980 and

58
1982) and Technology Policy (1983) provided for a liberal attitude towards foreign

investments in terms of changes in policy directions. The policy was characterised

by de-licensing of some of the industrial rules and promotion of Indian

manufacturing exports as well as emphasising on modernisation of industries

through liberalised imports of capital goods and technology.

Post-Liberalisation Period:

A major shift occurred when India embarked upon economic liberalisation

and reforms program in 1991 aiming to raise its growth potential and integrating

with the world economy. Industrial policy reforms gradually removed restrictions

on investment projects and business expansion on the one hand and allowed

increased access to foreign technology and funding on the other. A series of

measures that were directed towards liberalizing foreign investment included: (i)

introduction of dual route of approval of FDI – RBI’s automatic route and

Government’s approval (SIA/FIPB) route, (ii) automatic permission for technology

agreements in high priority industries and removal of restriction of FDI in low

technology areas as well as liberalisation of technology imports, (iii) permission to

Non-resident Indians (NRIs) and Overseas Corporate Bodies (OCBs) to invest up

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to 100 per cent in high priorities sectors, (iv) hike in the foreign equity

participation limits to 51 per cent for existing companies and liberalisation of the

use of foreign ‘brands name’ and (v) signing the Convention of Multilateral

Investment Guarantee Agency (MIGA) for protection of foreign investments.

FDI under the automatic route does not require any prior approval either by the

Government or the Reserve Bank. The investors are only required to notify the

concerned regional office of the RBI within 30 days of receipt of inward

remittances and file the required documents with that office within 30 days of

issuance of shares to foreign investors. Current FDI policy in terms of sector

specific limits has been summarised in Table 3 below:

Table 3: Sector Specific Limits of Foreign Investment in India

Entry Other
Sector FDI Cap/Equity
Route Conditions
 
A. Agriculture  
Automatic
1. Floriculture, Horticulture, Development of Seeds, Animal 100%
 
Husbandry, Pisciculture, Aquaculture, Cultivation of vegetables  
 
& mushrooms and services related to agro and allied sectors.    
 
2. Tea sector, including plantation 100% FIPB  
(FDI is not allowed in any other agricultural sector /activity)  
B. Industry
   
1. Mining covering exploration and mining of diamonds &  
100% Automatic
precious stones; gold, silver and minerals.
2. Coal and lignite mining for captive consumption by power
100% Automatic  
projects, and iron & steel, cement production.
3. Mining and mineral separation of titanium bearing minerals 100% FIPB  
C. Manufacturing
Automatic  
1. Alcohol- Distillation & Brewing 100%
2. Coffee & Rubber processing & Warehousing. 100% Automatic  
3. Defence production 26% FIPB  
4. Hazardous chemicals and isocyanates 100% Automatic  

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5. Industrial explosives -Manufacture 100% Automatic  
6. Drugs and Pharmaceuticals 100% Automatic  
7. Power including generation (except Atomic energy);
100% Automatic  
transmission, distribution and power trading.
(FDI is not permitted for generation, transmission & distribution of electricity produced in
atomic power plant/atomic energy since private investment in this activity is prohibited and  
reserved for public sector.)
D. Services
 
1. Civilaviation (Greenfield projects and Existing projects) 100% Automatic
2. Asset Reconstruction companies 49% FIPB  
74% (FDI+FII).
3. Banking (private) sector FII not to exceed Automatic  
49%
49% (FDI+FII)
6. Commodity Exchanges (FDI 26 % FII FIPB  
23%)

4.4: FDI Policy: The International Experience

Foreign direct investment is treated as an important mechanism for channelizing

transfer of capital and technology and thus perceived to be a potent factor in

promoting economic growth in the host countries. Moreover, multinational

corporations consider FDI as an important means to reorganise their production

activities across borders in accordance with their corporate strategies and the

competitive advantage of host countries.This section reviews the FDI policies of

select countries to gather some perspective as to ‘where does India stand’ at the

current juncture to draw policy imperatives for FDI policy in India.

China

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 Encouragement to FDI has been an integral part of the China’s economic

reform process. It has gradually opened up its economy for foreign

businesses and has attracted large amount of direct foreign investment.

 Government policies were characterised by setting new regulations to permit

joint ventures using foreign capital and setting up Special Economic Zones

(SEZs) and Open Cities.The concept of SEZs was extended to fourteen more

coastal cities in 1984.Favorable regulations and provisions were used to

encourage FDI inflow, especially export-oriented joint ventures and joint

ventures using advanced technologies in 1986.

Foreign joint ventures were provided with preferential tax treatment, the freedom

to import inputs such as materials and equipment, the right to retain and swap

foreign exchange with each other, and simpler licensing procedures in 1986.

Additional tax benefits were offered to export-oriented joint ventures and those

employing advanced technology.

Chile

 In Chile, policy framework for foreign investment, embodied in the

constitution and in the Foreign Investment Statute, is quite stable and

transparent and has been the most important factor in facilitating foreign

direct investment. Under this framework, an investor signs a legal contract

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with the state for the implementation of an individual project and in return

receives a number of specific guarantees and rights.

 Foreign investors in Chile can own up to 100 per cent of a Chilean based

company, and there is no time limit on property rights. They also have

access to all productive activities and sectors of the economy, except for a

few restrictions in areas that include coastal trade, air transport and the mass

media.

 Chile attracted investment in mining, services, electricity, gas and water

industries and manufacturing.

Investors are guaranteed the right to repatriate capital one year after its entry and to

remit profits at any time.

Malaysia

 The Malaysian FDI regime is tightly regulated in that all foreign

manufacturing activity must be licensed regardless of the nature of their

business.

 Until 1998, foreign equity share limits were made conditional on

performance and conditions set forth by the industrial policy of the time.

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 In the past, the size of foreign equity share allowed for investment in the

manufacturing sector hinged on the share of the products exported in order

to support the country's export-oriented industrial policy.

4.5: Cross-Country Comparison of FDI Policies – Where does India stand?

A true comparison of the policies could be attempted if the varied policies across

countries could be reduced to a common comparable index or a measure.

Therefore, with a view to examine and analyse ‘where does India stand’ vis-a-vis

other countries at the current juncture in terms of FDI policy framework, the

present section draws largely from the results of a survey of 87 economies

undertaken by the World Bank in 2009 and published in its latest publication titled

‘Investing Across Borders’.

The survey has considered four indicators, viz., ‘Investing across Borders’,

‘Starting a Foreign Business’, ‘Accessing Industrial Land’, and ‘Arbitrating

Commercial Disputes’ to provide assessment about FDI climate in a particular

country. Investing across Bordersindicator measures the degree to which

domestic laws allow foreign companies to establish or acquire local firms.

Starting foreign business indicator record the time, procedures, and regulations

involved in establishing a local subsidiary of a foreign company.

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India’s relative position in terms of these four parameters vis-à-vis major 15

emerging economies, which compete with India in attracting foreign investment, is

set out in Tables 4.

Table 4: Investing Across Borders – Sector wise Caps – 2009

Health
Mini Constr
Agricul care
ng, Light uction,
ture Telecomm Trans and
Country oil manufact Electricity Banking Insurance Media touris
and unications portation waste
and uring m and
forestry manag
gas retail
ement

Argentina 100 100 100 100 100 100 100 79.6 30 100 100
Brazil 100 100 100 100 100 100 100 68 30 100 50
Chile 100 100 100 100 100 100 100 100 100 100 100
China 75 100 75 49 85.4 62.5 50 49 0 83.3 85
India 100 50 81.5 74 100 87 26 59.6 63 83.7 100
Indonesia 97.5 72 68.8 57 95 99 80 49 5 85 82.5
Korea, 100 100 100 49 85.4 100 100 79.6 39.5 100 100
Malaysia 70 85 100 39.5 30 49 49 100 65 90 65

65
Mexico 50 49 100 74.5 0 100 49 54.4 24.5 100 100
Philippines 40 40 75 40 65.7 60 100 40 0 100 100
Russian 100 100 100 100 100 100 49 79.6 75 100 100
South 74 100 100 70 100 100 100 100 60 100 100
Thailand 49 49 87.3 49 49 49 49 49 27.5 66 49
An analysis of key macroeconomic indicators in the select EMEs reveals that

India’s macroeconomic performance compares.

with other EMEs which receivedhigher FDI inflows during 2010 (Charts 1 & 2).

66
For instance, the GDP growth of India improved during 2010 as was the case with

the select EMEs. The current account balance as percent of GDP deteriorated

across the select EMEs, except Argentina. However, inflation in India was

generally higher (remaining at double digits for a long period) than other select

67
(exceptArgentina).

Thus, without any significant deterioration in Indian macroeconomic performance

compared to the select EMEs during 2010, the moderation in FDI inflows to India

68
points towards the probable role of institutional factors that might have

discouraged FDI inflows.

This is small and basic views of how Red Carpet is putting effects on Indian

economy in the way FDI. FDI is the main source for developing the GDP and

current condition of economy.

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CHAPTER 5:

CONCLUSION:

This study uses an experimental design to test the effect of red tape on procedural

quality and procedural justice. In so doing, we move beyond existing red tapoe

research with a cross-sectional focus on red tape conceptualizations and

associations. In line with we find out that Red Tape has a negative effect on both

our dependent variables. That is more red tape results in lower perceived

procedural quality, lower procedural justice. Taken together, these findings imply

that red tape has a negative effect on procedural characteristics that is not limited

to the researcher’s specific operationalization of red tape.

Before discussing the implications of this research, it is important to also note

some limitations of the current study at this point. First the experimental design

consisted of single vignette. Other studies may want to test whether our findings

are generalizable to other experimental research settings as well. Second, we have

not incorporated a stakeholder red tape perspective in the current study.

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The finding of the research show that integrating concepts from fields such as

social psychology can help broaden the depth and scope of red tape research. We

can conclude from this, our regulatory system is a linchpin of our well-being. It

allows us to live longer and healthier lives, among many other important impacts.

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