Foreign investors wary of small print in liberalised FDI

21 Jun 2016


Foreign analysts were not exactly overwhelmed after India on Monday announced a slew of measures to ease foreign investment in defence, civil aviation, pharmaceuticals, retail, food trade and broadcasting.

Officials said the measures will strengthen the country's efforts to be a global "manufacturing hub".

The sweeping reforms are aimed at shoring up confidence in the Indian economy among foreign investors at a time of global uncertainty arising out of fears ahead of Britain's vote on whether to remain in the European Union, said The Washington Post citing analysts.

The new measures also come two days after India's globally-known central banker Raghuram Rajan announced that he would quit after his term ends in September, a step that disappointed many economists and dampened the stock markets early on Monday.

The government's action opens up more than half a dozen sectors to easy, 100-per cent foreign investment. It said in a written statement that "with these changes, India is now the most open economy in the world".

Since Prime Minister Narendra Modi was elected to power in 2014, his government has worked to increase the ease of doing business in India, says the Post.

Over $55 billion worth of foreign investment came into the country between 2015 and 2016, up 15 per cent from the previous year, according to the government. (See: India has got $55 bn FDI in last 2 years: Swaraj) India's commerce and industry minister Nirmala Sitharaman told reporters that "manufacturing hub and creation of jobs are the twin-fold objectives" of the reform measures.

"We are reducing the number of sectors which we are locking up and saying 'don't touch it'," said Sitharaman.

India will now allow 100 per cent foreign investment in the defence industry, up from the current 49 per cent equity limit, in proposals that bring in "modern technology".

The earlier additional condition of bringing "access to state-of-the-art technology" was jettisoned Monday.

Some critics dismissed it as mere wordplay and not a radical reform. The definitions of such terms continue to be ambiguous, and will generate more frustrating conversations between officials and defence contractors in the coming months, they said. But Sitharaman said that "definitions will have to be simplified and clarity will emerge".

" 'State of the art' is subjective and could have led to a political witch-hunt later and hence most foreign companies were wary of using this provision," Amber Dubey, partner and India head of aerospace and defence at the business consulting firm KPMG, told the Post. He said that "easy terms like 'modern technology' will allow most leading defence companies to come in unhindered."

Modi's government raised the foreign investment limit in defence from 26 to 49 per cent in 2014. But many companies remained reluctant to transfer critical defence technology without real ownership.

The government also relaxed local sourcing norms up to three years for single brand retail trading of products that have "cutting edge" technology, a move that is likely to benefit Apple in its effort to open a chain of branded stores here.

"We will inform Apple to indicate whether they would like to avail the new provisions," Ramesh Abhishek, secretary of the Department of Industrial Policy and Promotion, told reporters. Apple had applied for exemption from the government's rule of 30 per cent local sourcing norm.

Another beneficiary is likely to be the home products and furniture company IKEA.

Perhaps the biggest step, some said, was to permit 100 per cent foreign investment for trading in food products that are produced locally.

"The opening up of the food trading holds the most promise and is likely to generate real investment," said Richard M Rossow, an expert in US-India policy studies at the Center for Strategic and International Studies in Washington, DC "If a foreign company comes in and sets up national grocery chain in India, it could be pretty significant in creating a huge number of low-skilled jobs," he told the Post.

 Foreign pharmaceutical companies can now invest up to 74 per cent automatically in existing brownfield projects, without government approval.

India also allowed 100 per cent foreign investment in the civil aviation sector, up from 49 per cent.

"The days of micro-management in aviation are gradually getting over," said Dubey. The change "will help bring in much needed cash, aircraft fleet and best practices."

The Indian economy is expected to grow at 7.6 per cent in the current financial year, said the World Bank in a report released on Monday. But agriculture, rural consumption, private investments, and exports have not performed well, the report said.

Rossow said that many fundamental barriers to doing business in India still remain, like land acquisition, labour laws and access to power.

"It is a good day for foreign investment and market access. But I would hold off on a making a very big deal of it," Rossow said.

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