Foreign direct investment gets 100 per cent Modi boost

Centre makes it easy for FDI in nine key sectors.

New Delhi:

The Centre on Monday allowed foreign direct investment (FDI) up to 100 per cent in the civil aviation and food processing sectors and eased norms for foreign inflows into the pharmaceuticals and defence sectors, among others, in what is being seen as a major reform move that comes days after Raghuram Rajan said he would not seek a second term as governor of the Reserve Bank of India.

This second wave of FDI reforms is seen by many as an attempt by the government to shift focus from Dr Rajan’s impending exit and a signal to investors of its commitment to reforms.

Prime Minister Narendra Modi hailed the move by tweeting that the changes would make India “the most open economy in the world for FDI” and provide a “major impetus to employment and job creation”. The stock markets reacted positively to the news of the FDI reforms even as they recovered from an early morning plunge after talking-up by influential market men that helped counter jitters about Dr Rajan’s exit.

The last time the government announced major changes in FDI was November 2015, after the Bihar Assembly election results, and that was seen as an attempt to allay concerns that reforms may slow down due to the BJP’s defeat in the state election.

The government, in a high-level meeting chaired by the Prime Minister, hiked FDI in Indian airlines to 100 per cent from the current 49 per cent. Now, FDI up to 49 per cent will be permitted under the automatic route (government approval not required) and FDI beyond that will need government approval. However, the limit for foreign airlines investing in Indian airlines will continue at 49 per cent. The government also decided 100 per cent FDI in existing airports will no longer require government approval. Till now FDI beyond 74 per cent in brownfield projects needed government approval. For new airports, 100 per cent FDI is already allowed without government approval.

In the defence sector, the government has removed the phrase “access to state-of-the-art” technology for approval of FDI proposals over 49 per cent. This means foreign companies will no longer need to commit to transfer high-level technology for permission to set up companies in India. At present, government approval is not required for FDI up to 49 per cent in the defence sector. The new norms have also been made applicable to manufacturing of small arms and ammunition covered under the Arms Act of 1959. Till now, FDI up to 49 per cent was allowed under the automatic route and beyond that under the approval route. In single-brand retail, the government decided to relax the norm that retailers have to source at least 30 per cent of their components locally. As per the new rules, these sourcing norms will be relaxed for up to three years and there will be a relaxed sourcing regime for another five years for “state-of-the-art” and “cutting-edge technology” products. This will allow Apple Inc. to open its stores in the country; Apple had been seeking a relaxation in sourcing norms.

One hundred 100 per cent FDI under the government approval route has now been permitted for retailing of food products manufactured or produced in India, including through e-commerce sites.

The pharmaceuticals sector also got a boost: up to 74 per cent FDI in brownfield pharmaceuticals will now be under the automatic route and investment beyond it will require government approval. Till now, any level of FDI investment in brownfield pharmaceuticals needed government approval.

The government hiked FDI in private security agencies from 49 per cent (with government approval) to 74 per cent. As per the new policy, FDI up to 49 per cent will be allowed without government approval and that beyond 49 per cent and up to 74 per cent will need government approval.

The government has removed the requirement of “controlled conditions” for 100 per cent FDI under the automatic route in animal husbandry (including breeding of dogs), pisciculture, aquaculture and apiculture.

The Centre also allowed automatic approval of 100 per cent FDI in broadcasting activities such as cable networks, mobile television, teleports, direct-to-home TV, and headend-in-the sky broadcasting services. However, the Centre said, “Infusion of fresh foreign investment beyond 49 per cent in a company not seeking licence/permission from sectoral ministry, resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor, will require FIPB approval.”

Foreign companies in the defence, telecom, private security and information and broadcasting sectors will no longer need RBI approval or separate security clearance to set up branch offices, liaison offices, project offices, or any other place of business in India if they have Foreign Investment Promotion Board approval or a licence/permission from the concerned ministry or regulator.

A government statement said past measures undertaken by the government have resulted in increased FDI inflows from $36.04 billion in 2013-14 to $55.46 billion in 2015-16, the highest ever FDI inflow for a particular financial year. “However, it is felt that the country has the potential to attract far more foreign investment, which can be achieved by further liberalising and simplifying the FDI regime. India today has been rated as the number one FDI destination by several international agencies,” the government statement added. The changes in the FDI policy, it said, are aimed at liberalising and simplifying norms to promote ease of doing business, encourage greater capital flows and make India an attractive destination for foreign investors.