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India’s drive to boost investment just isn’t working

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Asia's third largest economy is doing all it can to boost foreign investment to try and revive flagging growth. The problem, say analysts, is that the string of measures introduced in recent times are actually having the reverse effect and putting investors off.

On Tuesday, Indian Prime Minister Manmohan Singh made it easier for foreigners to invest in a range of industries, namely telecommunications, petroleum and natural gas, insurance and defense production amongst others.

The measure is the latest in a series of steps to relax rules on foreign investment, including moves to free up foreign investment in the country's huge retail sector in September and banking in December last year.

(Read More: India clears way for bigger foreign investment in banks)

But political disputes over the merits of such moves have made progress difficult and unnerved investors as a result, analysts say.

"The new measures can't hurt, but will they spur large amounts of foreign direct investment? I'm not so sure," said Rahul Bajoria, regional economist at Barclays.

"There have been so many measures over the past six to nine months, they seem to be backfiring and just creating political uncertainty. People don't know if there will be further easing, so they are taking a 'wait and watch' approach rather than jump in," added Bajoria.

Attracting foreign investment is an important part of the government's plan to fix India's struggling economy, which has struggled with weak growth and high inflation. India logged 5 percent gross domestic product growth in the fiscal year ending March 31, its slowest pace in a decade.

(Read More: New reforms— But will India embrace foreign investors?)

But so far foreign investors are keeping their distance from India, put off by the country's reputation for volatile politics, corruption and high levels of bureaucracy, analysts say.

Hopes were high that the retail sector would receive a boost after the landmark decision in September by the government to allow international supermarket chains to set up 51 percent-owned outlets in September.

But the challenges were quickly apparent, when the decision sparked strong criticism from the government's opposition parties, who argued that the move will take business away from 12 million traditional retail vendors. The principle opposition Bharatiya Janata Party, who rules many states, also refused to implement the policies.

U.S. retail giant Walmart, which has operated a wholesale joint venture with Indian retailer Bharti Enterprises since 2009, has so far refrained from proposing further investments amid allegations its Indian unit has violated U.S. anti-corruption laws. Both Ikea and Tesco, which have expressed interest in opening stores across the country, have also yet to detail plans.

(Read More: No quick fix for India's moribund economy)

'Opening doors doesn't mean they will come'

According to Barclays' Bajoria, attracting foreign investors is a multi-layered issue for India and is not as simple as improving accessibility.

"Just opening the doors doesn't mean they will come. It's not just one set of issues and isn't just about accessibility," he said. "A company does not necessarily need to be based in India to sell its produce there, look at Procter & Gamble [U.S. consumer goods conglomerate], for example, they manufacture abroad and have no problems distributing their goods in India," added Bajoria.

Rajiv Biswas, chief economist of Asia-Pacific at research house IHS Global Insight, said India's plans to further lift foreign direct investment caps in some sectors were a positive step in the right direction, but unfortunately come at a time when there are growing concerns about the overall business climate.

(Read More: Why India's most promising sectors fail to deliver)

He said there are other stumbling blocks, like weak infrastructure and complex regulatory "red tape" which Indian policy makers need to work on improving to make the country attractive to foreign investment.

"Until India can stabilize inflation, the balance of payments situation, and get GDP growth back above 7 percent, foreign investors are likely to remain cautious about the Indian business outlook," Biswas said.

Still, India's consumption power is not lost on investors, and that should keep foreign firms interested despite the challenges.

"The long term attractiveness of India as a key growth market remain strong, due to its large and fast-growing middle class consumer spending power," Biswas said.

—By CNBC's Katie Holliday. Follow her on Twitter: @hollidaykatie

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