The eye catching headlines on July 17 relating to the >relaxation of foreign direct investment (FDI) limits in a number of sectors were certainly impressive. They appeared to convey the impression that a round of “big bang” reforms was under way, this time through a sweeping liberalisation of FDI rules in several key sectors, including telecom, defence, commodity exchanges, power exchanges and insurance. Certain sectors, however, did not share the munificence. They include civil aviation and media, where relaxations were anticipated.
No red tape
Not only could the FDIs go up to 100 per cent in certain cases (notably telecom), but the procedure has been eased. Investment approvals in many sectors will now come under the automatic route instead of through the more cumbersome procedures of the Foreign Investment Promotion Board (FIPB).
Some of these measures were anticipated, more likely wished for by protagonists of reform. The government did spring a surprise by announcing relaxations in so many sectors at one go. The avowed objective is to reverse the negative sentiment among overseas investors.
The expectation is that even over the near-term, foreign money will start coming back. That, in turn, should stabilise the rupee which has been depreciating rapidly. Looming large in government’s thinking is the size of the current account deficit, which at 5 per cent of the gross domestic product (GDP) in March 2013 (about Rs.90,000 crore) is clearly unsustainable. Adding to the pressure points are the persistently high oil prices. The rupee’s fall by nearly 5.5 per cent in June will inflate the petroleum import bill offsetting any tangible gains that might accrue from the sharply lower gold imports in June.
Unfazed reaction
However, the financial markets were not particularly impressed. The bellwether stock indices did not respond as favourably as one would have hoped for. The rupee slipped from a two-week high to close at 59.34 to the dollar. (It closed the week at >59.35 on July 19 )
If the government hoped for immediate results, it must have been disappointed. But realistically, FDI relaxations can impact only over time. How friendly are they to serious investors?
A few points are relevant here. One, the impression that the guidelines are final and can be acted upon is not correct. The Cabinet has to approve these. Even if that is seen to be routine — after all senior ministers are behind the guidelines — there are individual cases, notably the decision to raise the FDI cap in insurance to 49 per cent that require further approvals. The insurance bill incorporating the change is before Parliament, its passage might be contentious.
Two, while procedures for approving the investments have been simplified, the government — through the FIPB — still retains powers to approve the investments. In nearly all cases, for instance, where 100 per cent FDI will be permitted, up to 49 per cent will be cleared under the automatic route and the balance by the FIPB. Three, from the point of view of overseas investors, the guidelines might be most welcome but putting money in India at this juncture could be a difficult proposition for a variety of reasons.
Bad omen
In what could be a bad omen, two large overseas companies pulled out of their large projects almost at the very moment government announced the new FDI guidelines.
On Tuesday, Korea’s Posco announced its decision to exit from a $5.3 billion >steel project in Karnataka citing difficulties in acquiring land and access to iron ore. Much the same reasons were cited by ArcelorMittal, the world’s largest steelmaker while shelving its $7 billion project in Odisha.
To be sure, both the investors have not abandoned India. Posco continues to pursue its $10 billion mega steel project in Odisha, said to be the single largest FDI till date.
ArcelorMittal has plans on Jharkand. Also pertinent, the global steel industry is in doldrums and these companies are very big players in the international scene.
At the very least, their pull-out ought to send out wrong signals to prospective investors. India might have become an easier place to enter but continues to be a difficult place to execute their projects.
narasimhan.crl@thehindu.co.in
