On the eve of Prime Minister Narendra Modi’s departure to the UK, the Prime Minister’s Office issued a set of pronouncements claiming they are the much-needed reforms impetus to the now moribund economy. The PMO announced foreign direct investment (FDI) “reforms in as many as 15 sectors.”
According to the government’s release, “The crux of these reforms is to further ease, rationalise and simplify the process of foreign investments in the country and to put more and more FDI proposals on automatic route instead of government route where time and energy of the investors is wasted.” The government claims that these FDI reforms are set to benefit sectors such as agriculture and animal husbandry, plantation, defence, broadcasting, civil aviation and manufacturing. “Further refining of foreign investments in key sectors like construction where 50 million houses for poor are to be built.” But a reading of the details tells us that little has been added to what is already there. Let’s take a few for examination.
The release proposes opening up the manufacturing sector for wholesale, retail and e-commerce so that industries are motivated to “Make in India” and sell it to customers here instead of importing from other countries. The fact is that existing business entities can sell their services and products in any way they deem fit. Whether by direct retail or by e-commerce. To announce now that they can do so is neither here nor there. It is just stating the obvious and making a virtue of it.
The opening FDI up to 49 per cent in the construction sector is a modest refinement of the existing rules, but also a step backwards. Under the tweaked rules, FDI is allowed in projects with a minimum built area of 20,000 square meters, down from a previous 50,000 sq.m threshold. The minimum capital investment by foreign companies was $5 million. India earlier allowed 100 per cent FDI in real estate development but with strict conditions, including a lock-in period of three years during which the investment could be repatriated. Now that lock-in period is removed, but capping the FDI in construction to 49 per cent is regressive rather than reformist. Besides, how does this address the problem facing the construction sector
FDI did not exactly flow into the construction sector because the growth became extremely sluggish due to a huge demand contraction and a huge oversupply of home and commercial real estate.
How does the government announcement stimulate investment in this area now The sector needs fiscal and tax policy reforms that will incentivise families to invest in homes.
In the United States, the way mortgages work is that the principal portion of your payment increases slightly every month, year after year. It’s lowest on the first payment and highest towards the end. Thus, as time goes by and as incomes rise, the individual’s equity grows! The tax laws allow homeowners to deduct the loan interest from their tax obligations. For most people, this is a huge deduction since interest payments can be the largest component of the mortgage payment in the early years of owning a home.
Construction is a critical area too for generating employment for the million unskilled, and mostly rural, youth who enter the workforce each month. To rejuvenate this sector we need a slew of monetary and fiscal measures to make consumer investment easier and attractive. Clearly the PMO has nothing in mind by way of any hard-headed solutions, and is only looking at making it to the headlines.
Raising FDI limits from 26 per cent to 49 per cent in any sector can hardly be deemed a reformist move. What the foreign investors are looking for is unfettered control over their investments and not being forced into a partnership with the regime’s CII and Ficci cronies.
It makes little difference if FDI is raised from 26 per cent to 49 per cent. Which defence major will transfer its proprietary technology to a venture in which it is forced to have a minority stake Besides what is the rationale of imposing a 49 per cent ceiling on a business planning to make weapons here, when 70 per cent of defence purchases are from overseas companies, which are 100 per cent foreign- owned Wouldn’t it have been simpler and more intelligent to announce sourcing from even 100 per cent FDI companies as long as the manufacturing was local By doing this, the value addition will accrue to India’s economy and there could also be collateral benefits in the form of local vendors and technology absorption. It seems little thinking has gone into this “supposed fast tracking by the PMO”. It seems like the motive is to make it appear business as usual in the PMO and that the Prime Minister is unfazed by Bihar’s rebuff.
It would seem that the only beneficiary of the PMO’s announcement is IKEA. When it sets up shop in India Ikea will not be required to source 30 per cent of the good sold from local companies or artisans. Who does IKEA benefit then, apart from itself and its overseas suppliers It would have been truly reformist to allow FDI in retail with the proviso that the companies are foreign exchange neutral i.e., they can directly import to the value of what they directly export.
If it is believed that the expansion of organised retail will lead to the expansion and modernisation of supply chain, it would make sense to incentivise local procurement by the big chains.
The usual suspects have applauded the PMO’s announcement in business and trade associations. This takes few in anymore.
A well-known major industrialist during the heydays of the licence permit raj, the late Lala Charatram when asked if he supported the then Prime Minister, replied that he indeed supports the Prime Minister, and added sotto voce “any Prime Minister”. It’s a good investment to cheer up a Prime Minister when he is down. A wise Prime Minister will see through this cheer.
The writer, a policy analyst studying economic and security issues, held senior positions in government and industry. He also specialises in the Chinese economy.
