Govt Relaxes FDI Norms to Boost Growth and Sentiment

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The government on Monday announced fresh round of foreign direct investment (FDI) liberalisation. The sectors to benefit will be single brand retail, civil aviation, airports, pharmaceuticals, animal husbandry, and food products. This is the second big reform in FDI since those announced in November 2015. The move comes a day after RBI governor Raghuram Rajan, announced he would not seek another term. It seems that by relaxing FDI norms, the government has tried to contain any fallout of investor confidence on Rajan's exit and this week's vote on Britain's future in the European Union (EU).

For more than two decades, India has moved cautiously on relaxing FDI norms in the belief that a quick relaxation of FDI norms would disadvantage domestic producers and force them to sell out to foreign players. The cautious FDI policy has been counterproductive. The struggling Aviation sector which long lobbied for a liberalised FDI regime is a good example of this.

The government has taken following key decisions regarding relaxing FDI norms:

• Allowed up to 100% FDI in defence through the approval route.
• 100% FDI in 100% FDI under government approval route for trading, including through e-commerce, in respect of food products manufactured or produced in India.
• 100% FDI in greenfield pharma via the automatic route, 100% in brownfield pharma - of which 74% will be through automatic route.
• 100% FDI in domestic airlines, with FDI up to 49% permitted under automatic route and FDI beyond 49% through Government approval. 100% FDI under automatic route in brownfield Airport projects.

The government has also decided to relax local sourcing norms for FDI in single-brand retail for products having "state of art" and "cutting edge" technologies. This will likely make it easier for companies like Apple to set up manufacturing units in India. Other single-brand retailers like furniture giant IKEA are also expected to benefit.

Foreign investment is crucial for India, which needs around US $1 trillion for overhauling its infrastructure sector such as ports, airports and highways to boost growth. A strong inflow of foreign investments will help improve the country's balance of payments situation and strengthen the rupee value against other global currencies, especially the US dollar. FDI inflows for the financial year ending March 2016 stood at US$ 40 billion, up from US$ 30.9 billion in FY 15.

The government's move to liberalise foreign investment will improve investor sentiment in the short-term. Also, in the long-term, it will benefit firms operating in these sectors. Manufacturing and job generation will also get a boost by the latest round of liberalisation in FDI norms that include doing away with dual clearances.

Overall, there is no dispute that the FDI relaxations, are a step in the right direction irrespective of whether they were timed to signal the Centre's commitment to reforms in the face of Governor Rajan's announcement.

However, opening up more avenues for FDI cannot be the answer to all problems. In order to deliver more, the government now needs to look at the domestic investments that are still stuck and try to bring them back on track as well.

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