The tide of adverse publicity over the exit of RBI governor Raghuram Rajan that threatened to derail the government’s economic agenda was reversed with the awesome force that could be commanded by none other than prime minister Narendra Modi himself, putting to rest speculation that the world was waiting to condemn India as an economic pariah.
Shrugging off the criticism unleashed on the government in the wake of Rexit, the Union cabinet flung the doors wide open to full foreign ownership of the defence-industrial complex within the country, alongside clearing the skies for 100 per cent foreign direct investment in civil aviation. It also cleared the way for the world’s most valuable company Apple Inc to open its exclusive retail outlets in India (see accompanying report) and allowed up to 100 per cent FDI in pharmaceuticals and a host of other sectors subject to approvals.
In scope, the breadth of Modi’s sweeping reforms in foreign investment guidelines compares with the firman of Mughal emperor Shah Alam granting the diwani of Bengal, Bihar and Orissa to the English East India Company in 1765, alongside free trading rights, that ultimately cleared the way for the Company’s complete takeover of the Indian market. Modi tweeted the changes would make India “world’s open economy for FDI” and provide a “major impetus to employment and job creation.”
Modi had resorted to big time reforms opening of 21 industry sectors to foreign investment after losing the Bihar election last November. Officials in the prime minister’s office (PMO) expect Monday’s decision to double FDI investments to over $100 billion annually in the next three years. According to a PMO statement, FDI inflows stood at $55.46 billion in 2015-16 against $36.04 billion in 2013-14.
While opening up most sectors to foreign investments, the government continues to prohibit FDI in lotteries, gambling, atomic energy, real estate and real estate investment trusts (Reits).
The cabinet approved 74 per cent FDI in pharmaceuticals under the automatic route in brownfield investment, while stating that government nod would be required for 100 per cent investment. This is not only expected to open India’s lucrative market for medicines to multinational giants, but also create a big scope for mergers and acquisitions.
The government has allowed 100 per cent FDI in civil aviation, of which investments up to 49 per cent would be under the “automatic route”. In addition, 100 per cent FDI would be allowed in brownfield or existing airport projects under the automatic route. This could benefit carriers such as Qatar Airways and Emirates that have been waiting to step up investments in Indian carriers. Share prices of domestic carriers Jet Airways, SpiceJet and Indigo Airlines’ parent InterGlobe rose on the Bombay stock exchange.
The government has also relaxed local sourcing norms for investment in single-brand retail for up to three years. Companies selling products with “state of the art” and “cutting edge” technology would get a further five-year exemption from local sourcing requirement. Apple and IKEA are expected to be major beneficiaries of these decisions.
In allowing up to 100 per cent FDI in defence, the government has done away with the requirement of “state of the art” technology, while considering investments above 49 per cent.
The Modi government has already outlined its plans for building a robust defence-industrial complex at home instead of importing weapons systems from abroad. India ranks among the world’s biggest arms and armaments importers.
The government has permitted 100 per cent FDI for trading and e-tailing in food products made in India, subject to approvals. It has also allowed 100 per cent FDI in cable networks, direct to home broadcasting and mobile TV under the automatic route. Besides, it will clear up to 49 per cent FDI in private security agencies under the automatic route, while investments up to74 percent will require government nod. It has allowed 100 per cent FDI in animal husbandry, pisciculture, aquaculture and apiculture under the automatic route, doing away with the requirement of “controlled conditions”.
Earlier in the day the World Bank released its India Development update, that stated, “FDI inflow is likely to be robust…As the government continues to open additional sectors of the economy, FDI is expected to be sufficient to finance the CAD (current account deficit)” up to 2018-19.
Commerce minister Nirmala Seetharaman rebutted charges that the decisions were meant to counter the adverse fallout of RBI governor Raghuram Rajan’s exit. Industry secretary Ramesh Abhishek added, “We were working on this policy for quite sometime and it has nothing to do with RBI governor’s decision.”
Original equipment makers (OEMs) that had hitherto adopted a “wait and watch” approach may now be willing to set up manufacturing facilities and tap India’s multi-billion dollar defence equipment market. Nearly a thousand companies from 47 countries have been eyeing the Indian defence market that is slated to expand to $620 billion in the next six years.
The government expects foreign companies like Airbus, Boeing, Lockheed Martin and Dassault Aviation to set up bases here to manufacture the entire spectrum of armaments from warships and missiles to fighter aircraft and small arms.
Rahul Gangal, partner with the Muncih-based Roland Berger Strategy Consultants believes that the new policy “is a significant step forward to ensure OEM subsidiary driven manufacturing plans take off. It will result in greater comfort for OEMs to establish high technology and larger work share driven significant product manufacturing subsidiaries in India. India will be better integrated in the global aerospace and defence supply chain.”
Indian industry is also likely to benefit from the enhanced offsets pie that would be available.
Allowing 100 per cent FDI in scheduled airlines and transport services through the approval route is a big decision, though foreign investors have already been allowed 49 per cent stake in existing players through the automatic route. In September 2012, the UPA government had allowed foreign airlines to invest up to 49 per cent in Indian carriers. This helped Abu Dhabi-based Etihad pick up 24 per cent equity in Jet Airways. Later, Singapore Airlines and Air Asia Bhd entered the Indian market with the launch of two airlines in collaboration with the Tata Group.
Amber Dubey, partner and India head of aerospace and defence practice at global consultancy KPMG said the policy will help bring in much needed cash, expand fleet and introduce best practices. “We may see its positive impact over next six to12 months,” he added.
Peeyush Naidu, partner at Deloitte, however, sounded cautious on how soon foreign funds would start flowing into the sector.
The move to allow 100 percent foreign ownership of scheduled airlines has come as a surprise to many who cited over 20 per cent growth in domestic air traffic, while airlines were busy consolidating their operations following years of losses.
A senior airline executive, who did not wish to be named, said that the move was not warranted at the moment as the industry was currently reaping the dividends of low fuel price and were sufficiently capitalised.
“A company planning to enter into air transport business in India would like to start afresh rather than investing in an existing company which has many legacy issues,” he said.
InterGlobe Aviation that operates IndiGo raised Rs 3,010 crore last November through initial public offering (IPO). A few months ago, it was reported that another low-cost carrier SpiceJet was in talks with a set of investors. National carrier Air India is in dire need of cash infusion, but the government has repeatedly said it was not looking at divestment in the airline.
Some of the regional airlines like Air Costa and Air Pegasus may benefit from the change in FDI norms, as they need cash to augment fleet and stay afloat in competition with the bigger airlines.
The latest policy changes come close on heels the national aviation policy (NCAP-2016) last week that liberalised the rules (5/20) for start-up carriers to fly abroad and laid down easier norms for starting regional airlines to boost air-connectivity.
Similarly, relaxation in 30 per cent domestic outsourcing norm for single brand foreign retailers first three years and another five years in cases where “cutting-edge” technology is involved, is expected to bring in big foreign investment.
Last month, Apple CEO Tim Cook had demanded such a relaxation from prime minister Modi as precursor to manufacturing iPhones in India. Industry secretary Abhishek told newsmen that Apple would be asked, “whether they would like to avail the new provisions on outsourcing.”
Abhishek said the biggest impact would be seen in the pharmaceuticals sector.
Kanchana TK, director general of the Organisation of Pharmaceutical Producers of India (OPPI) that represents multinational drug manufactures said, “(The decision) will augur well with our members who are constantly exploring ways of ensuring new drugs and medicines are made available to Indian patients.”
SV Veeramani, president of Indian drug manufacturers association (Idma) that largely represents domestic manufacturers said the latest changes “will possibly lead to inflow of over $5 billion in the next five years, through earlier we expected FDI to the tune of $2-3 billion”.
Veeramani agreed with government’s assessment that the latest policy “will provide an impetus to employment and job creation in India.”
By Nirbhay Kumar & KA Badarinath
(This story originally appeared on Financial Chronicle)
