FOREIGN DIRECT INVESTMENT IN JAMMU AND KASHMIR

Editorial May 27, 2024

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Historically, India has followed a very vigilant and restrictive policy regarding foreign capital or foreign donations to India. The general Indian psyche continues to view foreign money in India as a harbinger of colonialism, as that is how the English East India Company eventually made inroads. Politics on this subject is thus most volatile in India.

FDI is an investment by a company located in another country, either by buying a company or by expanding business in a target country. Foreigners may subscribe to the shares and debentures of companies located in India. Thus, FDI refers to the purchase of a particular organisation’s stake by another foreign organisation.1 In the specific context of India, it means investment by a non-resident person or an entity having its registered office outside India in the share capital of an Indian company.2 To define it comprehensively, FDI means investment through capital instruments by a person resident outside India in an unlisted Indian company or in ten percent or more of the post-issue paid-up equity capital on a fully diluted basis of a listed company.3

Over the years, India has become one of the preferred destinations for foreign investments owing to favourable demographics (India has not only a large consumer population; its choices are highly varied as well, thus making it an ideal place to market or sell products of different kinds) as well as a noticeable and consistent growth trajectory.

During the financial year 2021 – 22, India witnessed its highest ever FDI inflow of approximately US$83.57 billion.4 The increasing number of FDI may be largely attributable to (1) various policy reforms introduced by the Indian government in order to liberalise the economy and enhance the ease of doing business in India; and (2) geopolitical considerations and global trade relations, pursuant to which investors are diverting their investments away from China.5 However, whilst the noose around foreign donations has tightened with the passage of time, the interest in inviting foreign capital has increased both due to increased confidence in the stable democracy that India has been and also due to the many needs to be part of the global world and generate employment. After economic reforms in 1991, India has liberalized its foreign direct investment (FDI) policy.

The Government of India took a number of measures to promote FDI. As of date, India is the third or fourth most preferred destination for investment after China, the US and Brazil for major global companies. A large and growing domestic market, favourable demographics, consistent growth, liberalised policies, and improved ease of doing business combine to make India a popular investment destination. Prior to 1990, India’s businesses were mostly inward looking and government control, as opposed to regulation, was high. This was commonly referred to as License Raj in India.

The period 1970–80 was considered ‘FDI restrictive period’, as the Foreign Exchange Regulation Act 1973 was a restrictive law not welcoming of FDI. After 1990, a host of steps were taken to liberalise FDI, which included a dual route of approval, i.e., (i) a direct investment up to the allowed limit under intimation to the RBI or beyond the allowed limit by application to the Foreign Investment Promotion Board (FIPB) and the Secretariat for Industrial Assistance (SIA). (ii) liberal technology agreements and technology imports; (iii) special permission for NRIs and Overseas Corporate Bodies; (iv) liberal use of foreign branding.

In the late eighties, the Indian economy faced a severe balance of payments crisis. In this critical phase, economic reforms were made in 1991, and India opened its doors to FDI inflows and adopted a more liberal foreign policy as set out above. While other parts of the country saw steady growth in FDI, the State of Jammu and Kashmir (JK) however, despite having much to offer, did not inspire investor confidence. JK’s special status under Article 370 of the Constitution of India posed a significant obstacle by giving the State a separate constitution, flag, and internal rules and regulations.

It prohibited non domiciled-JK residents from purchasing or renting land and prevented businesses from investing in the region’s real estate and infrastructure. Autonomy inadvertently created barriers to FDI. Security concerns and unrest in the disturbed region further dissuaded investors. The full economic potential of the Jammu, Kashmir and Ladakh regions was unrealised. In 2019, the government revoked the special status of JK by abrogating certain provisions of Article 370 of the Constitution. While Article 370 still exists, its restrictions have been lifted. JK became a union territory (UT) with a legislature of limited powers and directly under the control of the Central government. Ladakh was separated from the State of JK and became a UT without a legislature. Not only did these developments redefine the state’s political status, but they also significantly impacted its economy. Economic prospects were revitalised because of significant investment, especially FDI.

Amendments to land laws allowed non-residents to buy and rent land, particularly non-agricultural land. Investors could acquire land for development. The new domicile regulations allowed non-Kashmiris to move to the state, helping domestic industries and multinational companies establish profitable ventures. Major roadblocks to establishing businesses and industries were removed, creating an environment of peoplefriendly governance that welcomed new businesses and industries. Government initiatives have introduced policies, such as the New Jammu and Kashmir Industrial Policy 2021 – 30 and the New Central Sector Scheme for Industrial Development of Jammu and Kashmir (NCSS 2021). Such initiatives, focusing on the ease of doing business, have significantly increased investor interest in industrial units in the region.

A stable investment environment and liberalised policies following the dilution of Article 370 have attracted growing interest from domestic and foreign investors in vital sectors such as agriculture, tourism, and manufacturing. The government gained effective control over the growth of Jammu and Kashmir, shaping investment policies to attract FDI, including tax breaks and infrastructure insurance. Diluting Article 370 gave the government of India effective economic control over JK, allowing it to shape the state’s investment policy by attracting FDI. Following the constitutional change, JK has developed a forward-looking investment policy. A notable investment in JK has come from Dubai’s Emaar Group, known for building the Burj Khalifa.

It plans to build a USD 60 million shopping mall and office complex, significantly contributing to the region’s economic stabilisation. The project is expected to create some 16,000 jobs for local young people. Although the economy of Jammu and Kashmir has improved, challenges are still to be overcome. Substantial investment is urgently needed in infrastructure, including roads, power, and connectivity, to develop the state’s economic potential. FDI must create jobs.

The reduction of high levels of unemployment in JK is urgent. The benefits of FDI must reach all sections of society by focusing on sustainable development. The lifting of restrictions was a milestone for JK, opening up its economy. Improved security conditions and liberalised land policies have led to a significant surge in FDI, unlocking JK’s potential in agriculture, manufacturing, and tourism. With the government’s initiatives and policy reforms, JK is being transformed into an investment-friendly destination.

Properly regulated, FDI will boost the state’s business environment, creating jobs and encouraging further investment. As the region strives for economic growth and development, FDI will play a critical role. The sky’s the limit if future opportunities for growth are seized effectively and efficiently.