Decision helps government regain investor confidence
June 22, 2016: The Indian government led by Prime Minister Narendra Modi made sweeping changes to foreign direct investment (FDI) norms announcing easier terms and conditions for investors in sectors ranging from civil aviation to pharmaceuticals. The government has increased sectoral caps, raised limits under the automatic route and relaxed mandatory requirements for FDI.
The move came a day after Raghuram Rajan, governor, Reserve Bank of India, announced his decision to return to academics at the end of his tenure in September and not seek an extension. The news had sent the equity and currency market into a frenzy with many economists saying that investors might lose confidence in India.
However, investors seem to have regained some of the lost confidence by the changes in FDI rules.
The measures that have been announced are:
1. 100% FDI under the government approval route for trading in food products manufactured in India.
2. FDI above 49% in the defence sector is now permitted through the government approval route. Previously, approval of FDI above 49% also required access to ‘state-of-the-art’ technology, a clause which has been dropped.
3. 100% FDI in broadcasting carriage services, under the automatic approval route.
4. 74% FDI in brownfield pharmaceutical projects under the automatic route and FDI above 74% subject to government approval. Previously, all FDI in brownfield projects was subject to government approval. For greenfield projects, 100% FDI is allowed under the automatic route, the same as before.
5. 100% FDI under the automatic route for brownfield airport projects. Currently, FDI above 74% in brownfield projects requires government approval. For greenfield projects, 100% FDI is allowed under the automatic route, the same as before.
6. 100% FDI in scheduled air transport service, from 49% earlier. FDI up to 49% will be under the automatic route and beyond that will be subject to government approval.
7. 74% FDI in private security agencies, from 49% earlier. FDI above 49% will be subject to government approval.
8. Relaxation of local sourcing norms up to eight years for single brand retail.
Many economists applauded the changes.
Craig Chan, research analyst, Nomura, says, “The announcement of FDI liberalisation measures should help ease investors’ concerns about India, as it should demonstrate that the government’s reform agenda remains in place despite recent uncertainty following the announcement of Rajan’s departure from the RBI.”
Girish Vanvari, head of the tax practice at KPMG in India, said the move will open up the country to global businesses. “The liberalisation of limits in defence, brownfield pharma, airports, private security services, food processing etc can be game changers and be a huge source of employment creation. The move to bring most sectors under the automatic route is a big mindset shift,” Vanvari said in a note.
The government has also decided to allow overseas entities — excluding airlines — to own 100% in domestic airlines as it seeks greater FDI inflows into the country.
But investor are unlikely to rush in soon, says Peeyush Naidu, partner, Deloitte India. “While the increase in FDI for aviation is welcome, as it will allow flexibility, we are unlikely to see investors suddenly rushing to invest in airlines just because the cap of 49% has been removed. Also remember that investment by foreign airlines is still capped at 49%. So it remains to be seen whether other investors, such as PEs and the likes, would have the risk appetite to make such investment,” says Naidu.
Paul Lyons, strategy director, International Bureau of Aviation (IBA), says, “The FDI news can only be seen as encouraging in terms of encouraging competition and stimulating M&A. We would expect the Middle East carriers and those locations with a large Indian diaspora – such as the US, Canada and the UK – to be among the first to expand operations”.
There is good news for single-brand retail players like Apple Inc. They will now get a three-year blanket exemption from the 30% local sourcing norm. Additionally, there will be another five-year exemption if the company produces a product which is state-of-the-art and has cutting edge technology.