The NDA government has unveiled another round of economic policy reforms by liberalising the foreign direct investment norms in nine key sectors ranging from defence to aviation, pharmaceuticals to retail trade. This is the second such easing of norms since November. The new measures are expected to pave the way to attracting more foreign investment since they target sectors which have been relative laggards in attracting FDI. The sectors targeted in the latest round account for just 11 per cent of the total FDI received by India. Compare that to the top five sectors — services, construction, computer software and hardware, telecom and automobiles — that account for a 45 per cent FDI share.
Apart from focusing on the unexplored sectors, the government should be complimented for aggressively bringing in more and more activities under the automatic route, which reduces bureaucratic discretion and promises policy certainty. For instance, in the pharmaceutical sector, FDI in brownfield projects is now allowed upto 74 per cent under the automatic route. But even more creditable is the fact that the government has tried to ease the terms and conditionalities that have traditionally been a deal breaker. For instance, local sourcing laws in the case of single brand retail have been relaxed upto five years in case of cutting edge technology. In the defence sector, the pre-condition of access to “state of the art” technology has been done away with.
The policy changes are promising. A 100 per cent FDI allowance for trading, including e-commerce in food products that are made in India, can be expected to enthuse the major players in this sector. Relaxation in FDI in aviation is likely to go well with the recently unveiled civil aviation policy. Defence, a sector which has yet to receive FDI, is also likely to benefit. It is true that given the series of changes under the current NDA regime, there is now just a small negative list where FDI is not allowed. However, opening the door to investments is just the first step. It is more a statement of intent, an invitation for investors and companies around the world. To truly achieve its aim of opening up — to increase employment and create jobs for the millions streaming into the labour force every year — the government will have to do more. India continues to enjoy a lowly rank in the ease of doing business. Retaining the investments that come in as a result of these measures will be the key challenge.