The NDA government on Monday announced, what it termed, a “radical liberalisation” of the Foreign Direct Investment (FDI) regime by easing norms for a host of important sectors including defence, civil aviation and pharmaceuticals, opening them up for complete foreign ownership.
The decision’s timing assumes significance as it comes soon after Raghuram Rajan’s announcement last Saturday that he won't be seeking another term as the Reserve Bank of India Governor. The governor's decision days before the possible exit of Britain from the European Union, had triggered fears that India's growth narrative could unravel.
However, the FDI reforms unveiled on Monday afternoon, blunted the early morning volatility in equity and currency markets by calming and reassuring investors about the continuing reform drive. The BSE Sensex recovered from a low of 26,447.88 in opening trade on Monday to an intra-day high of 26,885.49 points, before ending at 26,866.92 – up 241.01 points or 0.91 per cent.
While the Opposition Congress termed the decisions as a “panic reaction” that would not happened had Mr Rajan not dropped the bombshell, Commerce and Industry minister Nirmala Sitharaman stressed the announcement had nothing to do with the RBI governor's decision.
“We have been working on this for quite some time. We could not have done all this in one or two days,” Sitharaman said. On Rajan's short tenure, she said, "When [former] Prime Minister [late] Rajiv Gandhi was in power, an RBI governor was appointed and removed in just 20 days," adding, however, that the government respected Rajan's work.
The decision on FDI reforms, taken at a high-level meeting chaired by Prime Minister Narendra Modi, also included paving the way for companies such as Apple Inc to immediately set shop in India.
However, the government has tightened rules for such companies producing items with cutting-edge and state-of-art technology -- by giving them only a three-year blanket exemption from the 30 per cent local sourcing norm over and above the five years where the 30 per cent procurement requirement would have to be met as an average of five years’ total value of the goods purchased. This is to ensure that they manufacture in India rather than making profits through just trading activities.
In defence, foreign investment beyond 49 per cent (and upto 100 per cent) has been permitted through the government approval route, in cases resulting in access to modern technology in the country. The condition of access to ‘state-of-art’ technology in the country has been done away with, as many foreign investors had complained about the ambiguity regarding that term.
The decisions included permitting 100 per cent FDI under government approval route for trading, including through e-commerce, in respect of food products manufactured or produced in India, bringing into effect the proposal made in the Budget 2016-17.
To promote the development of pharmaceutical sector, the government has permitted up to 74 per cent FDI under automatic route in existing pharmaceutical ventures. It added that the government approval route will continue beyond 74 per cent FDI and upto 100 per cent in such brown-field pharma.
The government has permitted 100 per cent FDI in India-based airlines. However, a foreign carrier can only own upto 49 per cent stake in the venture, and the rest can come from a private investors including those based overseas. This is expected to bring in more funds into domestic airlines. To boost airport development and modernisation, 100 per cent FDI in existing airport projects has been allowed without government permission, from 74 per cent permitted so far. The move comes close on the heels of the new civil aviation policy that relaxed norms for domestic carriers to fly abroad.
“Today’s FDI reforms will give a boost to employment, job creation and benefit the economy. This is second major (FDI) reform after the last radical changes announced in November 2015,” Mr Modi said in a tweet. In November last year, the government announced FDI reforms across several sectors, two days after the BJP-led NDA suffered a resounding defeat in the Bihar Assembly polls and a day before Mr Modi's visit to Britain.
Mr Modi on Monday said, “Now most of the sectors would be under automatic approval route,” adding that with these changes, India is now the most open economy in the world for FDI.
“These are good measures that will help in creating headroom for foreign capital to come in, especially in sectors such as defence and civil aviation that are capital intensive,” said Akash Gupt, Partner (regulatory services), PwC. He added that many of the decisions were also about removing unnecessary process bottlenecks, thereby making it easy for investors to invest in India.