The Qatar Airways test

If it can buy Indian airlines, FDI changes truly big

Whether the FDI reforms announced on Monday are evolutionary or revolutionary will depend upon whether they pass what can loosely be called the Qatar Airways or the Singapore Airlines test—the fact that the ‘radical changes in FDI policy’, to quote the PIB release on the subject, come a day after government came in for a lot of flak over RBI Governor Raghuram Rajan possibly suggests they were timed to get Rajan off the front pages of pink papers! Of all the changes, the biggest relate to the aviation sector. Allowing only 74% FDI in existing airports while 100% was allowed for new airports was always stupid, and Monday’s policy fixes this by allowing 100% FDI in existing airports as well. Potentially, an even bigger change is that for airlines where the automatic FDI limit was 49%—the limit for NRIs was always 100%. Under the new rules, FDI up to 100% is to be allowed through government approval—foreign airlines, though, can still only buy up to 49% equity. The change is only‘ radical’ if this means Singapore Airlines or Air Asia can buy up the 51% share the Tatas own in Vistara or Air Asia. Theoretically, some other Singapore or Malaysian company can buy out Tatas and the airlines can be fully foreign owned—whether that company can be an affiliate of Singapore Airlines or Air Asia is another question. Whether this will be allowed can only be tested when there is such a proposal—it is not clear how the new 100% norms can be reconciled with the current clauses which mandate the majority of an airline’s board have to be Indians, as does the management and the chairman; nor do the new guidelines say these have been scrapped.

The reason why caution has to be the operative word on FDI policy, needless to say, is the Apple single-brand retail case—Apple is supposed to be another big beneficiary of Monday’s policy since the UPA’s 30% local sourcing norms didn’t allow Apple to set up its own stores here. Last November, the government came out with rules which said the local-sourcing rules could be relaxed for ‘cutting-edge’ and ‘state-of-the-art’ technology, labels that most would have thought applied to Apple. Yet, when Apple’s application for setting up its own stores came, the government rejected it. So while it is true that Monday’s policy talks of relaxing local sourcing norms for ‘up to three years and a relaxed sourcing regime for another five years’, it still talks of doing this for ‘state-of-the-art’ and ‘cutting edge’ technology—whether Apple will get approved this time around remains an open question and it doesn’t help that there is still no definition of what ‘state-of-the-art’ or ‘cutting edge’ technology are.

In the defence sector, the new norms allow F DI beyond 49% in case it provides‘ modern technology’ or‘ for other reasons to be recorded ’— this was allowed under the earlier policy only for‘ state-of-the-art’ technology which has now been done away with. Theoretically, this means 100% FDI can be allowed on grounds it will create more employment. Similarly, while foreigners can only take over existing pharmaceuticals firms after government permission—this was done after a few Indian firms like Ranbaxy were bought by foreigners—the new policy allows 74% FDI under the automatic route and by government approval after that. The policy will be tested if, for instance, foreign firms buy 74% of aB ha rat Biotech and Serum Institute which produce the bulk of vaccine sin India and, say, hike prices. The proof of the pudding, as the old saw goes, is in the eating.