After surpassing China to become the fastest growing economy in the world, India could now set its eyes towards narrowing the gap in Foreign Direct Investment (FDI) flows with its neighbour after the government last week announced sweeping changes to FDI policy governing nine key sectors. With this announcement, which is the second such major overhaul of FDI norms in the last seven months, the government has now thrown open most of the sectors to foreign investors with the negative list being very limited. Major changes announced include increase in the sectoral cap (maximum investment limit) in certain sectors, bringing more activities under the automatic route (will not require prior government approval) and relaxing certain conditions governing FDI to improve the ease of doing business.
While one section of the industry feels that the government’s latest overhaul of FDI norms was a strategic move to lift investors sentiment as it came just two days after the Reserve Bank of India (RBI) governor Dr Raghuram Rajan expressed his intentions to return to academia at the end of his tenure, others see these announcements as the continuation of the Modi government’s reform programmes aimed at improving the ease of doing business, attract investments, create jobs and make India a manufacturing hub of the world.
During the last two years, India has witnessed a significant jump in FDI inflows despite a slowdown in the global economy. In FY16, the total FDI inflows into India stood at $55.45 billion, the highest ever in any financial year till date. In FY15, the figure was $45.14 billion, up 25 per cent from FY14. According to the World Investment Report 2016 released by United Nations Conference for Trade and Development (UNCTAD), India received the tenth highest FDI inflows in 2015. US topped the chart with $380 billion worth of investment while China remained at third spot with investments of $136 billion .
“FDI has played a major role in making China a global economic powerhouse. It has received massive foreign investment in the manufacturing and infrastructure sector. In the case of India, FDI has played only a secondary role in India’s growth storytill date. Our growth was primarily led by domestic capital. That needs to change. Given our potential, FDI should have a higher share in India’s growth especially in the manufacturing and infrastructure sector,” said Madan Sabnavis, chief economist, CARE Ratings.
According to CARE Ratings, the five leading sectors in terms of flow of FDI into the country so far are services (17.6 per cent), construction (8.4 per cent), computer software and hardware (7.3 per cent), telecom (6.4 per cent) and automobiles (5.2 per cent). These sectors account for around 45 per cent of the total flow of FDI into the country. “As the industries where norms have been eased are outside this list, it may be expected that there could be an increase in flows in a more diversified manner. The FDI trend has remained positive for the last two years, which is very encouraging for India,” added Mr Sabnavis.
However, he felt that the government should also take further steps towards the ease of doing business so that investors, both domestic and foreign, are encouraged to invest in the country. “There is clearly potential to push up the overall flows to above $ 60 billion on the whole including $ 50 billion through equity. Given that interest rates will be increasing in the United States, and investment outflows could get truncated, the overall environment should improve if this objective is to be realised,” he added.
Some of the sectors that saw a major overhaul of regulations include food products, defence, broadcasting carriage services, pharma, civil aviation, private security agencies, animal husbandry and single brand retail trading. While it will take some time for investment to materialise in these sectors, experts said retail trading and broadcasting could see some momentum in the coming months.
“The move to open up the domestically manufactured food products sector to FDI will enable farmers to directly sell their produce to retailers, thereby reducing margins for middlemen. Additionally, potential investments by the investors in cold-storage and warehousing will ease supply-side pressures and arrest wastages, that have been driving inflation (in the present scenario, lack of investment in logistics and inadequate storage facilities have been creating inefficiencies in the food supply chain, leading to significant wastages) — all these initiatives will also help improve margin for farm produce and contain food inflation,” said rating agency ICRA.
On increasing the FDI cap from 49 per cent to 74 per cent in private security industry, Ramesh Iyer, vice-chairman and CEO, Topsgrup said the government’s decision would transform the industry and drive growth. “Currently, the industry size is Rs 40,000 crore, which is expected to almost double in the next few years. The spurt in investment will enhance usage of technology, larger employment opportunities, better statutory compliance and the much-needed consolidation in the sector. Also, as strategic partners, the foreign companies will bring in the best global practices to the Indian market. However, it is yet too early for the law to be effective as the government will have to work towards amending PSARA Act’s section 6 clauses (2) which currently prohibits any foreign based company to have a majority stake in the Indian Security Company,” he added.
