With green shoots in the economy looking to strike roots, the government’s decision on Monday to open up a bunch of sectors including defence, aviation, pharmaceuticals and retail to FDI serves one big purpose: it prepares the country for attracting funds as global corporations scout around for better returns with easy ownership rules in promising markets. Amidst global headwinds, India still is an economy with comparatively brighter growth prospects over the coming two years.
It was only last November that the government undertook an overhaul in the FDI regime targeting more than a dozen sectors including construction, airport services, banking, defence, broadcasting, etc. Monday’s measures are a continuation of the progressive liberalisation process. But the government could have dared to be even more radical given the fact that appetite for investment is low, and the scope for improvement both in terms of ‘ease of doing business’ and FDI rules in certain sectors leave many investors only half-convinced about the India story.
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For instance, why cap foreign airline stake in Indian companies at 49 per cent when you do away with the FDI cap or in other words allow 100 per cent FDI? Foreign airlines, more than private equity funds or FIIs, would be interested in getting a larger share of the growing domestic business. Coupled with this, why shouldn’t the government put Air India on the disinvestment roster?
In some other sectors, say pharmaceuticals, the foreign investor concern is not so much FDI caps, but on the larger issue of price controls. While the government could have fully opened up the sector (it has now allowed up to 74 per cent FDI in brownfield projects under automatic approval), what’s bothering drug companies is the enlarging scope of drug price controls, which adversely affects profits. The sector can definitely do with more clarity and certainty on the pricing regime.
India did attract record FDI inflows of $55.46 billion in 2015-16 compared with $36.04 billion in the previous year. And FDI is far more durable and sustainable than foreign portfolio investments. FDI in manufacturing creates employment, quite desperately needed in a country like India where a million plus youth enter the job market every month.