Recently Modi government relaxed norms for Foreign Direct Investment (FDI) in various sectors in India with the object of giving a boost to the Indian economy. New sectors have now been opened up where FDI can be brought in either via automatic route or through the approval of the government. The government will also bring a small negative list which will specify conditions related to FDI’s. With this, the message given by PM Modi to the foreign investors is clear- ensuring ease of doing business for investors in India remains a top priority for the present regime. The Liberalized reforms will not only help in attracting additional foreign capital for major initiative such as ‘Make in India’, but shall also remove unnecessary hindrances by making it easy for foreign investors to invest in the Indian markets.
Some of the relaxations brought in by the Government in some major sectors and their likely benefits are:-As per the Government note, FDI inflows rose to US$ 55.46 billion in financial year 2015-16 against US$ 36.04 billion in financial year 2013-14.
1. Present FDI norms permit 49% FDI under automatic route.
2. FDI above 49% permitted through Government approval wherever it was likely to result in access to ‘state-of-art’ technology in the country.
1. Foreign investment beyond 49% will now be permitted through the government approval route.
2. New norms have done away with the condition of access to the ‘state-of-art’ technology in the country.
3. FDI relaxation for defence sector has now also been extended to manufacturing of Small Arms and Ammunitions.
1. Higher ownership will now encourage foreign defence firms to set up manufacturing facilities in India.
2. Doing away with the clause “state of the art” technology for investments above 49% will give the government more power to decide on proposals by foreign firms.
3. With terms like ‘modern technology’ and ‘other reasons’ more defence firms are likely to come and invest in India.
4. There will be a major boost to the small arms manufacturing sector as more foreign players will be attracted towards this sector.
1. Existing policy on pharmaceutical sector provides for 100% FDI under automatic route in greenfield pharma
2. FDI up to 100% is allowed under government approval in brownfield pharma.
Now, it has been decided to permit up to 74% FDI under automatic route in brownfield pharmaceuticals and for FDI beyond 74% government approval route will continue.
A joint report by Assocham and TechSci Research released in Dec, 2015 said “Indian pharmaceutical industry is expected to touch USD 55 billion by 2020 as against the current size of USD 18 billion.” By allowing 74% FDI via acquisitions under the automatic route, a foreign company will now be able to buy a majority stake without waiting for the approval of the government and this will ensure availability of more funds for present projects.
1. 49% FDI is allowed under the automatic route in domestic airlines for foreign entities.
2. FDI policy on Airports allows 100% FDI under automatic route in Greenfield Projects and in Brownfield Projects, FDI upto 74% is via automatic route and beyond 74% via government route.
1. The limit for local airlines has been raised to 100%, with FDI up to 49% permitted under automatic route and beyond 49% through government approval route. However, Investment by foreign airlines in domestic airlines will be limited to 49% of paid-up capital only.
2. 100% FDI allowed via automatic route in Brownfield Airport projects.
3. Under the automatic route 100% FDI in India will continue to be allowed for NRI’s.
1. 100% FDI will make local airlines attractive to foreign capital markets and shall help in bringing useful capital to revitalize this sector.
2. In a report, ‘India’s airport capacity crisis’ released in Jan 2016, Centre for Asia Pacific Aviation (CAPA) estimated that India is about to face a severe crisis as planned investments in upcoming and existing airports is only a fraction of the required $40 billion investment. The new norms on FDI by the Government on Airports will be beneficial to entities that run airports, as it will support them to raise investment in their existing assets and shall also address the alarm raised by CAPA in its report.
Private Security Agencies
FDI allowed under government approval route in private security agencies was 49%.
Now 49% FDI has been allowed in private security agencies under the automatic route but Government approval would be needed for FDI’s beyond 49% and up to 74%.
A FICCI-Grant Thornton report released in Dec 2015 said that India’s private security industry valued at Rs 40,000 crore in 2014 is likely to double by 2020 due to increasing concerns regarding security. The report also estimated that private security industry in India provides employment to more than 70 lakh people and is expected to further generate 50 lakh jobs by 2020. The private security industry has a huge employment generation potential and with more investments coming in, the sector will fulfill the employment needs of the country.
Broadcast (Cable Networks, Direct to home (DTH) & Headend in the sky (HITS))
100%FDI allowed, only 49% through automatic route and for FDI beyond 49% approval from Government was required.
1. Now, the government has allowed 100% FDI through automatic route.
2. Foreign investments, beyond 49% in a company not seeking license/permission from sectoral Ministry, which result a change in the ownership pattern or transfer of stake by existing investor to new foreign investor will require approval from Foreign Investment Promotion Board (FIPB).
Now DTH operator’s, Headend-in-the sky (HITS) operators, cable network companies and mobile television operators can raise 100% FDI without seeking consent from the Foreign Investment Promotion Board (FIPB).
The current FDI policy in retail allows multi-brand retailers to invest only 51% while opening retail stores in the country.
Single brand stores can have 100% ownership, but a restriction is imposed which requires the single brand retailer to source 30 percent of its goods from India.
The Government has now decided to relax local sourcing norms for three years and a relaxed sourcing regime for another five years for entities which undertake Single Brand Retail Trading of products having ‘state-of-art’ and ‘cutting edge’ technology.
1. The earlier norm, for foreign single brand retail stores to source 30 percent of the value of the goods sold from the local companies in India, was seen as an obstacle by foreign investors. But now, after the exemption period of 3 years, foreign firms will be given five years to comply with 30 percent local sourcing norms.
2. The changes in retail rules is likely to help Swedish based furniture giant IKEA, which is opening its first store in Hyderabad next year, to expand its operations in India.
3. New policy will also open the doors of Indian market for US tech giant Apple. If after exemption period, it is able to generate huge profits from the Indian market, then it may consider setting up its manufacturing units in India which will create more jobs.
At present, 100 per cent FDI is allowed under the automatic route under ‘controlled conditions’ in animal husbandry, apiculture, pisci-culture and aquaculture.
Now the government has decided to eliminate the requirement of ‘controlled conditions’ for FDI in this sector.
Removing of the clause ‘controlled conditions’ will benefit the animal husbandry sector as now we will see FDI’s by major bio-genetics companies who shall bring their new technology to India and facilitate improvement breeds of livestock, with this milk production will increase and help the farmers in dairy industry.
Earlier 51 per cent was allowed in multi-brand retailing.
In respect of food products which are manufactured or produced in India, 100% FDI has been permitted under the government approval route for trading (including through e-commerce) in this sector.
The policy to allow 100% FDI in food processing without any conditionality and caps will attract investments from MNC’s like Walmart, Marks & Spencer…etc in back end infrastructure which is a need of the hour of this sector as it is estimated that approximately 30-40% production is wasted due to lack of infrastructure.
As per a report by FDI Intelligence, a division of The Financial Times Ltd, India replaced China as top destination for foreign direct investment by attracting $63 billion worth FDI projects in 2015. According to the report “India was the highest ranked country by capital investment in 2015, with $63 billion-worth of FDI projects announced.” The recent liberalization of FDI norms will again help in making India the desired destination of foreign investors and shall also help in meeting the long pending infrastructural requirements of various sectors in the country with the infusion of more capital in different sectors in the domestic market. The new norms will promote PM Narendra Modi’s agenda to bring in more foreign manufacturers to India and create millions of jobs in the country. The reforms also reflect upon the commitment of the Government in sustaining the pace of growth and development attained within last 2 years. It will also give boost to the Gross Domestic Product (GDP), which was recorded at rate of 7.6% for the financial year 2015-16, for the next financial year as well. The relaxations come as a second major push by the Government, last year also in November 2015 reforms were introduced to bring in more FDI’s in the country.
These norms come as push for the economy at the time when the exports have just stabilized after falling for 17 months in a row and have now contracted 0.79% in the month of May, leaving a trade deficit of $6.27 Billion. With greater amount of FDI inflows in the country, India will be able to gain access to the global platform in the world economy as products of superior quality shall now be manufactured by various investors in India for domestic market as well as for exports. FDI policy is assessed on an ongoing basis and then measures for its further liberalization are taken by the Government. “I am confident that India will emerge as a major global centre for defence industry. We will build an industry that will have room for everyone – public sector, private sector and foreign firms. A strong Indian defence industry will not only make India more secure. It will also make India more prosperous,” Prime Minister Narendra Modi had said, while inaugurating the Aero India 2015 at the Air Force Station Yelahanka, Bangalore. PM Modi accepts the role played by FDI’s in economic development of India as it not only boosts the domestic capital but also acts as an important source of world class technology, expertise and also serve as a major factor in upgrading the existing infrastructure in the country. The government with such a liberal and transparent FDI policy has facilitated foreign investors and has sent them a positive message which says that when it comes to FDI’s -India must remain their first choice.
(The author is a Research Associate at Dr Syama Prasad Mookerjee Research Foundation, New Delhi)