Another step forward

Liberalisation of FDI norms augurs well for the economy

The government has an enviable record when it comes to attracting foreign direct investment (FDI). The decision to liberalise FDI norms, taken by the Union Cabinet on Wednesday, is likely to further improve that image. Already, FDI inflows have doubled from $30.05 billion in 201314 – the last year of the United Progressive Alliance government – to $60.08 billion in 2016-17, an all-time high. Apart from the key change in civil aviation, which has allowed foreign airlines to invest up to 49 per cent under the approval route in Air India, the government has tweaked the FDI policy for single-brand retail, power exchanges, and the pharmaceutical and construction sectors.

In the single-brand retail, the Cabinet has allowed 100 per cent FDI through the automatic route, from 49 per cent at present. Retailers are now required to seek specific government approval for any increase beyond 49 per cent — the latest amendments have changed that. While marquee single-brand retailers may not necessarily be enthused to invest more, the move has cut the red tape and has ensured a more predictable and easier policy structure. Another measure that will brighten the prospects for foreign retailers is the decision to allow them to set off the value of goods sourced from India for their global operations against the 30 per cent mandatory sourcing requirement for India operations in the first five years. This provision, however, will expire after the first five years and thereafter single-brand retailers will be required to meet the 30 per cent local sourcing norm. Local sourcing norms have typically been a bone of contention. This relaxation of five years should help matters in the interim. Overall, it will ease the process for foreign as well Indian brands interested in being part of the Indian retail story. It is known that global companies take time to develop good suppliers as partners and hence the relaxed time frame for sourcing is conducive without compromising India’s need to be a good sourcing hub for global brands.

Another significant decision is 100 per cent FDI in construction development relating to building townships, housing and infrastructure and real estate broking services. The government has clarified that real estate broking services do not amount to real estate business and, as such, these services are now eligible for 100 per cent FDI under the automatic route. In the power sector, the government has removed the restrictions on investment by foreign institutional investors and portfolio investors in power exchanges through the primary market; till now they could do so only through the secondary market.

There was, however, no announcement on liberalising the multi-brand retail trade. So while Walmart and Metro will continue to be restricted to the cash and carry segment, that is, selling to wholesalers (instead of end-consumers), the domestic multi-brand retailers have heaved a sigh of relief. This could be seen in the share price of domestic multi-brand retailers such as Future Consumer and V-Mart Retail shooting up after the announcement. But while each of these changes may appear an incremental step in itself, the truth is this incremental approach often tends to be more pragmatic in India’s fractious polity. At a time when India is hoping to break into the league of the top 50 countries in the World Bank’s ease of doing business ranking, such changes go a long way in achieving that goal.