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IASbaba’s Daily Current Affairs – 27th May 2017

ECONOMICS

TOPIC: General Studies 3

Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Inclusive growth and issues arising from it.

Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

FDI reforms and Investment.

Abolition of Foreign Investment Promotion Board

In news:

The Union Cabinet recently approved the phasing out of the 25-year-old Foreign Investment Promotion Board (FIPB).
Earlier, in February, Finance Minister Arun Jaitley’s Budget speech had given a clear indication of the government’s intent to abolish FIPB.
The decision is aimed at making India more attractive for foreign direct investment (FDI) by improving ease of doing business and promoting the ‘Maximum Governance, Minimum Government’ principle.

(Note: Before going into the article, first, we have to understand – What is FIPB, its background and its functions?)

Understanding FIPB:

We know that, India is having a well-designed Foreign Direct Investment regulation regime. FDI is regulated through various norms. A minimum lock in period, minimum capital for investment, sectoral limits and most importantly regulation of entry into approval/automatic route are the important regulations.

In the case of entry regulations, FDI entry is made under two categories – automatic route and approval route. Approval from the government is mandatory for some type of investment. For this, approval institutions/bodies are created. The Foreign Investment Promotion Board is the most important approval body as it can consider FDI below Rs 5000 crore. Above this amount, the Cabinet Committee on Economic Affairs is the approval authority.

What is FIPB?

The FIPB (Foreign Investment Promotion Board) is an inter-ministerial body — or a single window clearance mechanism responsible for processing of FDI proposals and making recommendations for Government approval. It also grants composite approvals involving foreign investment/ foreign technology.
FIPB is located in the Department of Economic Affairs, Ministry of Finance and the Finance Minister is in charge of the FIPB.
FIPB was chaired by the economic affairs secretary and its other permanent members included secretary, Department of Industrial Policy and Promotion (DIPP), commerce secretary, economic relations secretary in the ministry of external affairs and overseas Indian affairs secretary. The small, medium and micro enterprises secretary and the revenue secretary were co-opted on the board.

Backround:

The FIPB was formed under the Prime Minister’s Office (during P.V. Narasimha Rao regime) in the mid-1990s as part of the first round of Indian economic reforms. It was reconstituted in 1996 and transferred to the Department of Industrial Policy and Promotion. It was transferred to the Department of Economic Affairs under the Ministry of Finance in 2003, according to its website.
As per the June 2016 FDI policy revision, the FIPB can give recommendations of FDI proposals below Rs 5000 crore to the Minister of Finance for consideration. As most of the FDI proposals are below Rs 5000 crore, it is well understood that almost all FDI proposals are examined by the FIPB.

Functions of FIPB

To quickly approve the foreign investment proposals.
To review the FDI polices and to communicate with other agencies such as the Administrative Ministries in order to set up guidelines that are transparent and which encourage FDI into the various sectors.
To look over the implementation of the various proposals those have been approved by it.
To take up such activities that encourage FDI into the country such as establishing contracts with international companies and also inviting them to invest in India.
To communicate with government, non-government and industry in order to increase the flow of FDI onto the country.
To identify the various sectors that requires FDI.
In the process of making recommendations, the FIPB provides significant inputs for FDI policy-making.

What next after FIPB’s abolition?

According to government rules, foreign investments in sectors under the automatic route do not require prior approval from the FIPB and are subject to sectoral rules. More than 90% of the total FDI inflows are now through the automatic route. The Foreign Investment Promotion Board has successfully implemented e-filing and online processing of FDI applications. There are now only 11 sectors (including defence and retail) needing government approval. The government feels that it has now reached a stage where FIPB can be phased out.

Therefore the move entails abolishing the FIPB and allowing administrative ministries/departments to process applications for FDI requiring government approval.

In other words, “Work relating to processing of applications for FDI and approval of the Government thereon under the extant FDI Policy and Foreign Exchange Management Act, shall now be handled by the concerned Ministries/Departments in consultation with the Department of Industrial Policy & Promotion (or the DIPP), in the Ministry of Commerce, which will also issue the Standard Operating Procedure for processing of applications and decision of the Government under the extant FDI policy.”

In short – Now individual departments of the government have been empowered to clear FDI proposals in consultation with DIPP.

The Cabinet Committee on Economic Affairs will continue to clear FDI proposals above Rs 5,000 crore.

Conclusion:

Government has shown its clear intent towards fast-tracking inflow of FDI, and the scrapping of FIPB is a notable step that would go a long way in supporting the objective of ease of doing business. The government believes that once the Board is history, red-tapism will shrink, ease of doing business will improve and investors will find India more attractive.

While the cabinet’s decision is seen as a simplification of the existing procedure to seek clearance on FDI proposals, experts have also raised doubts whether line ministries are equipped to take such decisions on an expedited manner.

The efficacy of this move will be determined by the ability of individual ministries (and sectoral regulators which may be involved in the ultimate decision) to exercise ‘discretionary’ powers without fear, favour or the cover provided by a collective decision-making body.

Apart from abolishing the FIPB, more reform is needed in areas such as land acquisition and labour laws to attract FDI.

Connecting the dots:

The Union Cabinet recently approved the phasing out of the 25-year-old Foreign Investment Promotion Board (FIPB) and has empowered individual departments of the government to clear FDI proposals in consultation with DIPP. Do you think this move will make India more attractive for FDI. Discuss?

INTERNATIONAL

TOPIC: General Studies 2

Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests

Effect of policies and politics of developed and developing countries on India’s interests

RCEP and India

Introduction

India must be forthright in its international engagements and thus build trade relationships across the globe. National interest should be primary but should also be guided by rules of the world trade and not be bullied by the developed and elite nations. RCEP will be a test in this regard.

Regional Comprehensive Economic Partnership (RCEP)

The Regional Comprehensive Economic Partnership (RCEP) negotiations were launched by Leaders from ASEAN and ASEAN’s free trade agreement (FTA) partners in the margins of the East Asia Summit in Phnom Penh, Cambodia on 20 November 2012.

RCEP is an ASEAN-centred proposal for a regional free trade area, which would initially include the ten ASEAN member states and those countries which have existing FTAs with ASEAN – Australia, China, India, Japan, Republic of Korea and New Zealand.
The objective of launching RCEP negotiations is to achieve a modern, comprehensive, high-quality and mutually beneficial economic partnership agreement that will cover trade in goods, trade in services, investment, economic and technical cooperation, intellectual property, competition, electronic commerce, dispute settlement and other issues.
RCEP forms part of the Government’s strategy for lowering trade barriers and securing improved market access for Australian exporters of goods and services, and for nation’s investors.
Key interests and benefits

RCEP participating countries are important economic partners and regional neighbours.
Most of leading trading partners (China, Japan, Republic of Korea, Singapore, New Zealand, Thailand, Malaysia, Australia and Indonesia) are participating in RCEP negotiations, and together.
RCEP will provide a basis for more open trade and investment in the region. This will help address concerns about a ‘noodle bowl’ of overlapping bilateral agreements and derive additional benefits (eg. through supply chains) from regional liberalisation.

Issue:

The fact that India is losing ground in trade negotiation talks with the Regional Comprehensive Economic Partnership — a bloc of 16 countries (Asean plus Japan, China, Korea, India, Australia and New Zealand) seen to be led by China is more visible.

When top commerce ministry officials said soon after the recent RCEP meeting at Hanoi, that India would agree to no more than 80 per cent free tariff lines (with a deviation of 6 per cent either way), against the demand of 92 per cent, it could not have come as a consolation to industry and agriculture that have already been inundated by dirt cheap and zero tariff goods from China and the ASEAN (with which India has an FTA), respectively.
India’s position marks a climb-down from two years ago, when it had proposed a three-tier tariff structure: 80 per cent tariff-free lines with ASEAN, essentially maintaining the FTA status quo; 65 per cent free lines for Japan and Korea; and 42 per cent free lines for China, Australia and New Zealand.
What is now on the cards, only as a best-case scenario, is perhaps 74 per cent free tariff lines with China to be arrived at over the next 15-20 years.
Meanwhile, India’s insistence on lower services investment and visa barriers for its professionals is not making headway. In this context, a rethink on RCEP talks is called for.

Pressure within RCEP:

RCEP’s pressure arises from the fact that tariffs within its other members are already remarkably low, with Japan and China deeply integrated into the Asean economy (and with each other) in terms of trade, investment and global supply chains.
India remains an outsider in this club, with the exception of China, with which it runs a huge trade deficit.
- India accounts for just over 3 per cent of ASEAN exports and below 2 per cent of the latter’s imports, whereas China accounts for over 11 per cent of ASEAN exports and nearly 20 per cent of its imports.
China has displaced Japan and the US as ASEAN’s principal trading partner.
The challenge is for India to break into this bloc at a time of growing protectionism in the West, without compromising its interests in agriculture, industry and intellectual property rights.
With the RCEP being more accommodative than the now defunct Trans Pacific Partnership to the conditions of developing countries, it may yet be possible for India to wrest this space.
Its USPs are its large market, its skilled workforce and its pluralist, democratic ambience.
India can be flexible about opening up sectors such as legal services, entertainment and accountancy. In the long run, it should ramp up its skill and technology levels to match RCEP countries by investing in R&D and quality education.
The key lies in driving growth through productivity and innovation, rather than low-cost labour alone.

Conclusion:

While trying to recover lost ground at RCEP, India must be clear about dovetailing tariff openness with its ‘Make in India’ programme. India must be assertive and accommodative in its negotiations which will help the process being hastened on multiple fronts. But India should not lose of become subservient to unmanageable conditions.

Connecting the dots: