In a sweeping overhaul of foreign direct investment norms across nine key sectors, the government Monday eased FDI caps for defence, aviation and food processing sectors. And did away with the need for prior government approval for up to 74 per cent FDI brownfield investment in pharmaceuticals.
The relaxation in norms, which the Prime Minister’s Office said made India “the most open economy in the world for FDI”, came two days after Reserve Bank of India Governor Raghuram Rajan announced he would not be serving a second term, a move that was expected to rattle markets Monday.
In the defence sector, the government has permitted foreign investment beyond 49 per cent under the government approval route, but done away with the condition of access to ‘state-of-the-art technology’.
Local sourcing norms for single-brand retail trading have also been relaxed for products deemed as having ‘state-of-the-art’ and ‘cutting edge’ technology. After the tweaking of norms, entities undertaking single-brand retail trading and seeking exemption from local sourcing norms for ‘state-of-the-art’ and ‘cutting edge’ technology can get waiver for three years, with the option of extending it by another five years. Earlier, there was no time limit for exemption from local sourcing norms.
Among other decisions, 100 per cent FDI has been permitted in teleports, direct-to-home, cable networks and mobile TV under the automatic route.
A statement from the PMO said: “The Centre has radically liberalised the FDI regime, with the objective of providing major impetus to employment and job creation in India. This is the second major reform after the last radical changes announced in November 2015. Now most of the sectors would be under automatic approval route, except a small negative list. With these changes, India is now the most open economy in the world for FDI.”
It has also been decided to permit 100 per cent FDI under the government approval route for trading, including through e-commerce, for food products manufactured or produced in India. The government had in the Budget for this fiscal announced that 100 per cent FDI would be allowed through the FIPB route in marketing of food products produced and manufactured in India.
The relaxation for local sourcing norms for single-brand retail trading could pave the way for Apple Inc to open its retail stores in India, though industry players cited the capping of the relaxation for a maximum of eight years as a disincentive.
“We will inform Apple to indicate whether they would like to avail new provisions,” Ramesh Abhishek, Secretary of Department of Industrial Policy and Promotion, told a press conference.
Proposals by other single-brand retailers such as Swedish furniture giant IKEA also stand to benefit.
India’s FDI inflows in 2015-16 increased to $55.46 billion as against $36.04 billion during 2013-14. The government last made changes to the FDI policy in November 2015, when norms for 15 sectors including banking, defence and construction were changed.
Among Monday’s decisions, in the defence sector, FDI proposals beyond 49 per cent have been put through government approval route, in cases resulting in “access to modern technology” in the country, while doing away with the state-of-art technology norm.
At present, 49 per cent FDI in defence is allowed under the automatic route, while FDI above 49 per cent is permitted through government approval on case-to-case basis, wherever it is likely to result in access to modern and ‘state-of-the-art’ technology in the country. The new FDI limit for defence sector has also been made applicable to manufacturing of small arms and ammunitions covered under the Arms Act 1959.
The government has also decided to allow 100 per cent FDI under automatic route in brownfield airport projects. At present, 100 per cent FDI is allowed under the automatic route in greenfield airport projects and 74 per cent FDI in brownfield projects under the automatic route, while beyond 74 per cent for brownfield projects is under government route.
The FDI limit for scheduled air transport service/domestic scheduled passenger airline and regional air transport service has been raised to 100 per cent, of which up to 49 per cent would be allowed under automatic route and beyond 49 per cent through government approval. For NRIs, 100 per cent FDI will continue to be allowed under the automatic route, but the FDI limit for foreign airlines has been capped at 49 per cent for both scheduled and non-scheduled air-transport services.
FDI in teleports, direct-to-home, cable networks, mobile TV have been included in the 100 per cent automatic route. For private security agencies, FDI up to 49 per cent is now permitted under the automatic route in this sector, while beyond 49 per cent and up to 74 per cent would be through government approval route.
The government has removed the requirement of ‘controlled conditions’ for FDI in animal husbandry, pisciculture, aquaculture and apiculture. At present, 100 per cent FDI in these activities is allowed under the automatic route under controlled conditions.
For establishment of branch office or liaison office or any other place of business in India if the principal business of the applicant is defence, telecom, private security or information and broadcasting, the government has decided that approval of RBI or separate security clearance would not be required in cases where FIPB approval has already been granted.
Market experts welcomed the changes in FDI policy announced by the government, with the allowance of FDI in food processing being seen as a positive step for farmers. “The policy change will definitely benefit farmers as it will enable them to get better rates for the produce and at the same time, overall reduction in wastage of food products for the country. It seems a win-win situation for consumer as well as the farmers, but we need to wait for the fineprint of the detailed guidelines to check the kind of conditions attached,” Devraj Singh, Executive Director -Tax & Regulatory Services, EY said.
“The increase in sectoral cap in the civil aviation will boost airline connectivity to other regional upcoming hubs and will definitely promote the foreign airlines to set up their own shop without any joint venture partner in India,” Singh said.