Just a step in the right direction

Make in India. Ease of doing business. These are two catchphrases that have been tossed around a lot by this government. The Narendra Modi-led government took a step towards acting on those catchphrases with the slew of reforms it announced this week to open the Indian economy to foreign investment and encourage global brands like Ikea and Apple to set up shop here.

While many of Monday’s announcements were expected, at least by those who track the government's actions closely on business related matters, they were still welcome.

“In a sense it’s part of the government’s continued drive for liberalisation and increasing ease of doing business in the country,” said Akash Gupt, partner and national leader of regulatory services and tax markets at PwC India.

Sure enough. And if you carefully parse all the announcements, you’ll see a common theme emerge —encourage companies across sectors to manufacture in India, and let’s try to make it a little easier for them to get to that point (although the latter has a lot left to be desired to really make it easy to do business in India.)

Let’s go through some of the sectors that will be impacted by these decisions: Pharmaceutical — Foreign investors can now buy up to 74% without any government approvals. The reason this is relevant is because India’s pharmaceutical sector has been a favourite of private equity players, most of whom have only sought a minority stake. But even for that, up until now, they had to get government approval. Post this reform, it removes that hassle and makes it easier for them to get on with their business.

Single brand retail — This has been the headline grabber thanks to recent interest by global titans, like Apple, who are finally realising there’s a market of several hundred million here that can buy their products, especially now that customers in their home markets have had their fill. Until this change, Indian rules required single brand retailers like Apple and Ikea to source 30% of their products from India. Now they have an exemption on that for three years and while they will still have to meet the 30% requirement for each of the next five years as per government policy, it’s up to them how to do that — each year, or cumulatively or any other combination of timing of their choice. The idea here, again, is to make it easy for companies to set up business and then once they are up and running and have enough volume of business, they then pull in local businesses into the production cycle.

Food retail — This is one policy that has caused the most angst amongst industry experts. Per this rule, foreign companies in India, who are currently banned from setting up supermarkets, or what is known as multi-brand retail, can get a toehold into that sector as long as the only thing they sell are fruits and vegetables grown or food products manufactured in India. “There is no retailer in the world who focuses only on food,” said Arvind Singhal, chairman and managing director of Technopak, a retail consultancy. But the idea here, again, no matter how far-fetched it may be, is to get companies to make these food products here, and encourage the development of food processing plants and cold storage chains.

And now we come to a sector that may actually fall under the category of game changer (unlike all the above) — defense. The new rules allow 100% foreign investment in defense companies. Last year, the government had opened that sector to 49% foreign ownership but saw few takers as no global company was willing to transfer its technology to a foreign (Indian) company. That is now expected to change. “This is the most liberal policy any government could have,” said PWC’s Gupt. “And it’s an important one for India as it aligns with the government’s Make in India push,” he said.

While most of these decisions weren’t unexpected, and wont be called revolutionary, what they do show is a feeling of restlessness in the Modi camp, experts say. Modi wants to show what he has been promising all along: investments and job creation.

The flip side of that is that just because the government has opened the door to foreign investors, doesn’t mean that they’ll be rushing in.

“Don’t expect miracles and results everywhere,” warned Madan Sabnavis, chief economist and chief general manager at Credit Analysis and Research Ltd, a credit rating agency. “The government still needs to make doing business easy because companies that want to come in will check —can I acquire land, can I hire labour, can I get environmental clearances — and those things haven’t been addressed,” he said.

It’s only when some of those real issues have been addressed (and who knows how long that will take) that we can expect to really see investors, and money, rushing to the country. Until then, this is a step in the right direction. Megha Bahree is a freelance journalist based in Delhi. She writes about business and development in the subcontinent. You can follow her on Twitter @mbahree.