In a move to quell the impact of central bank Governor Raghuram Rajan’s exit news on the stock market, the Government on Monday launched the foreign direct investment (FDI) bonanza, allowing 100 per cent inflows in a host of sectors — including civil aviation, food processing and defence. Besides, giving a breather to aspiring foreign investors, the Government also announced that there is no need for prior approval for the investment in brown-field projects in the sectors like pharma and aviation.
There was widespread speculation that the Indian stock market would face the Monday blues following the reports of Rajan’s decision to exit RBI after September 4, but the Government’s strategic move came well in time to neutralise the fallout. The stock market stayed in positive zone and stocks in aviation and defence sectors rallied around 8 per cent.
However, the rupee ended lower by 23 paise to close at an over two-week low of 67.31 against the US currency on heavy bouts of dollar demand amid uncertainty in the wake of Rajan’s decision against pursuing a second stint. The home currency opened sharply lower at 67.65 per dollar as against the last weekend’s level of 67.08 at the Interbank Foreign Exchange (Forex) Market and dropped further to one-month low of 67.70 on initial heavy dollar demand.
While opening up liberalised FDI reforms in most of the sectors, the Government tightened norms around single-brand retail trading, limiting up to 8 years the waiver for local sourcing norms. Now, those entities undertaking single-brand retail trading and seeking exemption from local sourcing norms for having state-of-the-art technology will get a waiver only for three years with an option of extending it by another 5 years.
Earlier, there was no time limit for exemption from local sourcing norms. With this change in norms, US-based Apple Inc will now have to take a call if they want to avail the waiver from the new local sourcing rules. This policy will certainly help enable Apple Inc to open stores under this decisions which also cover broadcasting carriage services, private security agencies and animal husbandry.
The major reform measures were decided at a high-level meeting chaired by Prime Minister Narendra Modi, which was earlier said to have been planned for Tuesday. But the Government took the abrupt move in order to neutralise the wide-spread negative sentiments.
In a move to see speedy progress on the reform path that will create massive job creation, Modi said the key reform decisions will make India the most open economy in the world for FDI. “The changes would provide a major impetus to employment and job creation in India,” he tweeted.
As there isn’t much time to pull off big-ticket items such as Goods and Service Tax (GST), the FDI signals seem to indicate that the Modi-led Government has a plan to crack the GST puzzle and give a boost to the country’s economy. However, Congress spokesman Jairam Ramesh described the decisions as a “panic reaction” which would not have come had Rajan not made the announcement and said the Congress does not believe that FDI is a magic wand.
Though private investment cycle is yet to resume in the desired manner to offer the required growth impetus to the economy, India has, indeed, seen an increase in inward FDIs in the recent years. The country received 42 per cent more FDI across sectors between June, 2014 and March, 2016, according to Commerce Minister Nirmala Sitharaman. Total FDI inflows, which stood at $30.9 billion in 2014-15, rose to $40 billion in 2015-16. The first batch of FDI reforms were announced by the Government in November 2015.
Sitharaman said that the decisions would help in attracting more investments, creating jobs and making India the global manufacturing hub. Asked whether the announcement was timed to counter the “hangover” of Rajan, she said, “This work was going on for a couple of months. Can all this work be done in a dayIJ It is proper to make the announcement when the work is complete.”
Welcoming the Government’s move, Economic Affairs Secretary Shaktikanta Das said the changes would do away with dual clearances of proposals and will boost manufacturing and generate more jobs.
The most important announcement made by the Government relates to civil aviation in which 100 per cent FDI has now been allowed in airlines, except by foreign carriers. Norms for overseas investment have also been relaxed in brownfield airports. Under the present policy, foreign investment up to 49 per cent is allowed under automatic route in domestic airlines. It has now been decided to raise this limit to 100 per cent, with FDI up to 49 per cent under automatic route and beyond that through Government approval.
In the defence sector, the policy has been tweaked to allow 100 per cent FDI by doing away with the condition of access to state-of-the-art technology. The new norms have also been made applicable to manufacturing of small arms and ammunition covered under the Arms Act. Under the current policy, FDI up to 49 per cent was allowed under automatic route and beyond that under the approval route.
For the pharmaceuticals sector, the Government relaxed the norms and permitted FDI up to 74 per cent through automatic route in brownfield projects and approval route beyond that limit to promote the development of this sector. The move assumes significance as FDI in the existing pharma companies has been a contentious issue as concerns have been raised over some M&As of Indian pharma companies by foreign giants.
In case of private security agencies, FDI up to 49 per cent is now permitted under automatic route and up to 74 per cent through approval route. The current policy permits 49 per cent FDI under the Government approval route in private security agencies. The Government has also permitted 100 per cent FDI under automatic route in several wings of the broadcasting carriage services which include teleports, direct-to-home, cable networks, mobile TV.
The Government has also decided to do away with the requirement of separate security clearance or RBI approval for setting up of branch or liaison offices by foreign companies dealing in defence, telecom, private security or information and broadcasting if the requisite approval of FIPB or the ministry or regulator concerned is in place.