A wind from the port side seems to be determining the direction of the ship of state in India. The left parties, all of whom provide critical support to the United Progressive Alliance government in the Lok Sabha, have announced that they will not support any move to hike the cap on foreign direct investment in the insurance sector. Given this gun on his temple, the finance minister, Mr P. Chidambaram might well be forced to roll back some of his proposals regarding FDI in certain sectors. The Bharatiya Janata Party, if the former prime minister, Mr Atal Bihari Vajpayee, can be taken at his word, has already announced its hostility to any such move. The left’s outburst is not entirely unexpected. The BJP’s position represents a retreat from its previous enthusiasm for economic reforms. What is entirely inexplicable is the amount of attention the issue has generated. It would appear from the brouhaha that the future of the Indian economy and of economic reforms stands and falls on the amount of FDI in certain sectors of the economy. This only serves to deflect discussion from what is a far more critical aspect of India’s economic future.

Investment, according to an old Keynesian chestnut, is an act of faith. Thus, what will determine the flow and the volume of foreign investment in India will be the overall investment climate. Foreign investors who have left Indian shores — among them are certain global players in the telecom sector — have never cited a cap on FDI as the reason for their exit. They departed because they felt that policy was confused and infrastructure was inadequate. They decided that investment in India was not worth it because exposure to risk was too great and thus adequate returns were not guaranteed. There are other countries in the developing world who have put a cap of 49 per cent on FDI and they are not starved of foreign investment. Investors invest in these countries because they have the faith that their money is protected and returns guaranteed. India still does not evoke such trust and confidence among investors. No steps have been taken to reinstate the faith and confidence of investors. Investor confidence remains low and the investment climate no more than fair. The presence of the left within the ruling coalition only serves to aggravate the prevailing poor climate of investment and the persisting absence of any kind of surge in investor confidence. The problem that Mr Chidambaram needs to address first, and more crucially, is the one relating to the investment climate.