FDI Reforms

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Search 10th January 2018 here http://www.newsonair.com/Main_Audio_Bulletins_Search.aspx

TOPIC:

General Studies 3

• Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
• Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

General Studies 2

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

In news: the Union cabinet recently gave approval to a number of amendments in the FDI Policy. These are intended to liberalise and simplify the FDI policy so as to provide ease of doing business in the country. These are

• 100% FDI under automatic route for Single Brand Retail Trading
• Foreign airlines allowed to invest up to 49% under approval route in Air India
• 100% FDI under automatic route in Construction Development
• FIIs/FPIs allowed to invest in Power Exchanges through primary market
• Definition of ‘medical devices’ amended in the- FDI Policy

FDI in single brand retail

Business to business retail has already been liberalized. This is retail to consumers from the business.

FDI policy in retail has been always controversial because ultimately it is throwing the door open to foreign investors in an area where there are large number of small domestic businesses like kirana shop owners, with small resources and limited ability to take on foreign competition. So any government looks at liberalizing the retail sector with lot of caution and circumspection.

Initially, foreign investment was upto 100% in single brand retail through the government approval route. It meant that any foreign company could actually float a wholly owned retail company in India selling goods to consumers without any Indian equity.

Now the government has decided that it doesn’t require to go to the committee of ministry that will look into each case and then take a call for their 100% approval. Now it will be automatic in the sense that the government control has been completely removed. The foreign companies which decide to come to India will have to inform the government and RBI will give clearance under the Foreign Exchange Management Act.

This is significant in context of very slow pace of foreign investments in the retail sector. India has seen a remarkable rise in the FDI in last few years. Despite that the retail sector has acquired a small share in total FDI. FDI in retail in 2017 was 5% of the total FDI flows and 9% in 2016.

The cumulative figure of FDI from 2001 to 2017 is at 4%. Thus, FDI flow in retail sector is still not large compared to 40 billion dollar base. With this liberalization, single brand retail will see some pick up in foreign investment flows.

Conditions on single brand FDI

• Sourcing from domestic manufacturing- policy pre-announcement of the previous government too
• One outlet opened creates jobs in retail outlet, value chain in the upstream and downstream has a positive impact
• When there is 30% value addition or 30% domestic sourcing, there is job creation not only in retail sector but also in manufacturing sector which produce those items which are used by those single brand retail.
• It also creates opportunities for exports because when a big brand comes and sets up single brand retail chain in country, it also looks at various cost advantages obtained in the county and market and looks at sourcing some of those items for retail chain in some other country or own country.
• Apart from organized employment in retail sector, the sourcing of raw materials, intermediate and final goods for these single brand retail stores, job creation opportunities are immense.

Competitive federalism will come

A state which will provide easier clearances, provide better infrastructure and also has a more attractive domestic market will have an advantage in calling this foreign investors.

No one loses

Studies have shown that advent of single brand retail helps create an ecosystem in which both the kirana stores and large chains can prosper. India is a young market and there is large number of young population which is willing to spend money in items of consumption.

With every single brand retail investor for a developed country coming in, it improves the basic infrastructure, the cold chains improve, and supply chains become more efficient. Thus, the rub off effect of foreign investment will be seen in retail sector.

Complementing electronic commerce

With its increased reach in the economy, single brand retail will put healthy competition to e-commerce. What is available on e-commerce sites will also available in single brand retail. Also, the single brand retail chain can sell its products through e-commerce portal and encourage the competitive environment to get better.

FDI in aviation

The policy in the aviation sector says that any foreign airline can invest upto 49% in capital of Indian companies operating scheduled and non-scheduled air transport services, up to the limit of 49% of their paid-up capital. Till now, the response from foreign airline companies has been lukewarm. Now, the government has also allowed foreign airlines to invest up to 49% under approval route in Air India. Together with it, GoI has put in place its privatization plan for Air India.

The investment in the aviation sector, as a percentage of total FDI inflows in India is less than half percent. Not many foreign airlines have come to India. However, Indian airlines have done good in creating a competitive market.

Conclusion

Foreign investment is a major driver of economic growth and a source of non-debt finance for the economic development of the country. Foreign investments also bring in the latest technical know-how and generate employment. The government has taken many initiatives in recent years by relaxing FDI norms across sectors such as defence, PSU oil refineries, telecom, power exchanges etc. Thus, it is the time to capitalize on the foreign investments and make attempts to create a favourable policy regime and robust business environment.

Key data for FDI in India

• Total FDI investments in India during April-September 2017 stood at US$ 33.75 billion
• Highest FDI in telecommunications sector – US$ 6.08 billion, followed by computer software and hardware – US$ 3.05 billion and services – US$ 2.92 billion.
• Maximum FDI equity inflows from Mauritius (US$ 11.47 billion), followed by Singapore (US$ 5.29 billion), Netherlands (US$ 1.95 billion), USA (US$ 1.33 billion), and Germany (US$ 934 million).

Connecting the dots:

• How does the foreign investments in India affect India’s economic growth? Critically evaluate in reference to major FDI policy decisions taken recently.