The announcement of reforms in >foreign direct investment (FDI) norms in a raft of sectors comes as a Deepavali bonanza to investors and the markets. The decision to relax FDI limits and conditionalities for investment in industries ranging from defence and plantations to single-brand retail and private banking is likely to offer overseas investors and existing promoters in these businesses significant new opportunities. The timing of the announcement, close upon the Bharatiya Janata Party’s drubbing in the >Bihar Assembly elections , is seen to signal Prime Minister Narendra Modi’s intent to return the focus to the economy and his promise of “minimum government, maximum governance”. Now, the government must carry this momentum through by articulating its agenda for important pieces of legislation in the coming Parliament session, such as those relating to the Goods and Services Tax or labour reforms. The National Democratic Alliance’s parliamentary managers will need to embrace consultation and consensus-building over confrontation and finger-pointing, and work with a reinvigorated opposition, if they are to make up the necessary numbers in the Rajya Sabha.
Among the various sectors, banks, defence and construction could benefit substantially from FDI reform. The decision to allow foreign institutional investors, foreign portfolio investors and qualified foreign investors to independently or together own up to 74 per cent — the prescribed sectoral limit — in private banks, subject to management control remaining unchanged, will offer some of them greater flexibility in expanding their capital base. At the same time, it will give investors the freedom of fungibility. In defence production, investment up to 49 per cent has been put under the automatic route, and proposals for higher overseas ownership will now go to the Foreign Investment Promotion Board instead of the Cabinet Committee on Security, shortening the lead times for approval. Significantly, portfolio and foreign venture capital investors can now hold as much as 49 per cent, double the 24 per cent that was permitted earlier. This should give a big fillip to local startups and could help nurture entrepreneurs developing indigenous technologies in a crucial and sensitive sector. Meanwhile, with a view to boost the availability of housing stock to achieve the > government’s goal of ensuring homes for all by 2022 , investment in construction activity has been freed from floor area and minimum capital infusion restrictions. Exit and repatriation of proceeds will be allowed automatically at any stage of a construction project, subject to a three-year lock-in period. The combination of all these measures could potentially boost FDI inflows and offer multiple spin-off benefits to the economy, not the least of which would be increased job creation and higher tax revenue. Still, for investors to actually bite the bait and begin moving capital and technology into the country, Mr. Modi must ensure that the reforms momentum is sustained over the coming weeks and months.
