Open Sesame: The FDI magic India had hoped for

The Narendra Modi government firmly underlined its reformist credentials and signalled unequivocally to foreign investors that it is serious about economic liberalisation by opening up or easing foreign direct investment (FDI) norms for nine sectors including defence, pharmaceuticals, food processing, single brand retail and aviation. “Today′s FDI reforms will give a boost to employment, job creation & benefit the economy," Modi said on Twitter shortly after the announcement of the new FDI norms. The Indian Prime Minister, who invoked his special powers to approve the guidelines, added that these will also improve the ease of doing business. "India now the most open economy in the world for FDI; most sectors under automatic approval route," he said. Reiterating that the latest round of reforms will boost the country's growth rate significantly and generate jobs for the 12-15 million young Indians who join the country's work force every year, finance minister Arun Jaitley said it would also reduce the role of the Foreign Investment Promotion Board (FIPB) as “overwhelming amount of FDI will come into the country through the automatic route”. For foreign investors, this will mean less bureaucratic red tape to deal with, fewer delays and faster entry into the Indian market. “The twin objective is to attract more foreign investments to promote India as a manufacturing hub and to create jobs,” commerce minister Nirmala Sitharaman told the media, adding that the Department of Industrial Policy and Promotion will prepare a small negative list barring which every other sector would be opened up to automatic approvals. No links to Rexit The decision to ease FDI guidelines came two days after Reserve Bank of India Governor (RBI) Raghuram Rajan announced that he would be returning to academia in the US when his tenure gives over in September. Senior ministers and officials, however, dismissed any links between the two events. The meeting on FDI was scheduled much before Rajan made his announcement, they pointed out. Sections of the Opposition and some analysts had suggested that the government announced the liberal FDI package to assuage foreign investors who were upset at the news of Rajan's impending departure from RBI. Easier entry into defence sector Till the latest revision in rules, FDI of up to 49 per cent was allowed in the defence sector under the automatic route. Higher levels of FDI were allowed on a case-by-case basis if it brought in “state of the art technology” into the country. This policy has resulted in the inflow of only about $167,000 of FDI in the defence sector. Large defence contractors in the US, Western Europe, Russia and Israel were obviously not keen on bringing in their latest technologies unless they were given a clear majority in and total control over the companies they set up or invested in. By replacing “state of the art” with “modern”, the revised policy takes bureaucratic discretion out of the equation and makes it easier for foreign companies to retain control of their Indian ventures. The norms for defence equipment will also apply to the manufacture of small arms and ammunition under the Arms Act 1959 in order to provide a fillip to this sector. Over the next decade, India is expected to buy defence goods worth almost $100 billion. At present, more than 70 per cent of all defence purchases are procured via imports. The new norms are expected to lead to a surge in FDI in the defence sector, especially as the Modi government pushes indigenous arms production under its flagship Make in India initiative and lead to the creation of thousands of white and blue collar jobs within the country. Flying high Foreign investors will be allowed to own up to 100 per cent of any airline in India, under the new FDI norms announced recently. At present, foreign airlines are allowed to own up to 49 per cent in any Indian airline. This cap will remain. That means foreign investors - institutional as well as individual - can own shares in airlines where a foreign carrier already has a 49 per cent stake. The icing on the cake is that NRIs will be allowed to invest 100 per cent in airlines under the automatic route. The Indian aviation market is among the most attractive in the world. After years of being awash in red ink, most Indian carriers have announced profits on the back on falling fuel prices and rising passenger payloads. In April, domestic traffic zoomed almost 22 per cent, marking the 20^th successive month of double digit growth. With India poised to remain the world's fastest growing economy for the foreseeable future and with oil prices expected to remain low, the prospects of the domestic aviation sector look bright and offer an attractive investment option for NRIs and foreigners, especially if one or more carriers approach the international markets with a public offer to finance their expansion plans.

From farm to fork "It has now been decided to permit 100 per cent FDI under government approval route for trading, including through e-commerce, in respect of food products manufactured or produced in India,” the Indian government said in a statement. This is in line with Jaitley's Budget statement liberalising investment rules in the food processing sector and sets the stage for multinationals such as Wal-Mart and Amazon to bring their formidable backend and logistics muscle to bear in this sector. Though a few groups of retailers have protested against the expected entry of these US retail giants into this sector, the gains to farmers, an equally powerful special interest group, as well as to the economy as a whole, is expected to ensure that that the government stays the course on this measure. At present, almost 50 per cent of all fruits and vegetables produced in India perish before they reach the market, resulting in a loss of billions of dollars. The entry of these two - and other foreign - players into this arena is expected to lead to large investments in cold storage chains, air-conditioned transport systems and other back-end infrastructure that will help the government meet its goal of doubling farm incomes. And this will also provide huge opportunities for both Indian and foreign companies to invest in this back-end infrastructure. Since food processing and distribution is a labour-intensive sector, it could generate millions of jobs over the next decade and absorb large parts of the army of youngsters who join the workforce every year. Easier entry for Apple stores

The government has relaxed local sourcing norms for foreign companies that want to open their own stores in India. Companies engaging in single brand retail with “cutting edge technology” have been exempted from local sourcing norms for three years and will be subjected to diluted local sourcing norms for five more years. Earlier, there was no time limit, which has now been set at eight years. This easing of norms could encourage companies such as Apple and IKEA to open retail stores in India. “We will inform Apple to indicate whether they would like to avail new provisions,” said Ramesh Abhishek, Secretary, DIPP, at a press conference. Dollars for India's drug majors Foreign investors will be able to acquire up to74 per cent in existing Indian pharmaceutical companies through the automatic route. This is expected to give a fillip to the $20-billion Indian pharmaceutical industry, which has helped position India as the world's affordable pharmacy. Investments beyond 74 per cent will required government approval. Prior to this tweaking of rules, 100 per cent FDI under the automatic route is allowed in greenfield pharmaceutical units. In brownfield units, 100 per cent FDI was allowed with government approval. There has been some criticism of this policy initiative and analysts have said large western drug companies could use these liberalised provisions to take over Indian generic drug producers in order to reduce the competition they face in world markets from cut price Indian medicines. The other sectors The government has also allowed 100 per cent FDI in direct-to-home, cable networks and mobile TV under the automatic route. It has also raised from 49 per cent to 74 per cent the FDI limit in private security services.

Investments of up to 49 per cent will be under the automatic route and any investments beyond this limit will be with government approval. Globally, the $220-billion security services industry has been growing at 7 per cent per annum. In India, however, the $5.5-billion sector has been expanding at 20 per cent. The government has also further liberalised norms for investments in pisciculture, apiculture, aquaculture and animal husbandry where 100 per cent FDI is already allowed. The requirement of “controlled conditions”, which was considered restrictive, has been removed. All these sectors are labour intensive and higher foreign investment limits is expected to lead to a sharp ramp-up in capacity and generate hundreds of thousands of new jobs over the medium term. In another major relief to foreign investors, the government has decided that such an investor in the defence, telecom, private security and broadcasting sectors wishes to establish a branch office or liaison office or any other place of business in India, then it will not require separate RBI or security clearance if the FIPB has already given clearance. Walking the extra mile Many of the reforms announced go far beyond what's allowed even in the West. For example, no other country allows 100 per cent foreign ownership of domestic airlines. Full ownership of defence units are also not allowed by any other country. No wonder Modi said: “India is now the most open economy in the world for foreign direct investment.” "The government has clearly demonstrated its intention that the reform process will go on. The Indian economy will continue to be on the upward path over the next few years," Jaitley said. Rising FDI graph In 2015-16, India received FDI inflows of $55.46 billion compared to $45.15 billion the previous year. In November last year, the government had liberalised FDI policy, making it easier for foreign investors to participate in the Indian defence, construction and banking sectors, among others. The latest round of FDI reforms, along with the liberal norms notified earlier, will considerably ease the pain of doing business in India - a major grouse of foreign investors. Taken together with reformist legislations such as the insolvency and real estate laws, the expected passage of the goods and services tax bill in the Monsoon Session of Parliament is expected to set the stage for rapid growth of the Indian economy.