FDI reforms welcome but investors need confidence

By Vipin Pubby
The sweeping overhaul of Foreign Direct Investment (FDI) norms across nine key sectors on the heels of the controversial announcement of the departure of charismatic RBI governor Raghuram Rajan has sent out conflicting signals on the economic front. Although the reforms may have been in the works for some time, the timing appears to aim at the damage control as a fallout of Rajan’s exit and contain any adverse impact on investor confidence from his departure.
Modi government has repeatedly proved that it is second to none as far as the perception game is involved. Thus whether it creates a grand event out of Modi’s address at the Madison Square and later in addressing the US Congress or attracts focus of attention when interacting with the Chinese premier or his Pakistan counterpart or even putting India’s stamp on the International Day of Yoga, the government had been striking the right chords at the right time.
The first set of FDI relaxations had come shortly after the Bharatiya Janata Party (BJP) had lost the prestigious Bihar elections and these did well to draw the world’s attention away from the humiliating defeat. The second set comes two days after Rajan announced, evidently after getting the signals from the government, that he would not seek extension of his term as had been the norm with his predecessors.
Rajan, a no-nonsense economist, who spoke his mind and took his own decisions, was a thorough professional. There were indications of differences between him and the government on certain key issues. His attempt to clean the banks of bad loans and holding on to high interest rates may have ruffled a few feathers but on the surface the government had been giving him enough elbow room. Some of his comments, like Indian economy compared to one-eyed King in the land of the blind, also drew ire of certain elements. The first indications about his imminent exit came from the maverick Subramanian Swamy, the outspoken Rajya Sabha MP, who demanded his ouster because he was “anti national”. His loss would be felt although there are several other professionals who may prove to be equally and even better than him if given a free hand.
The timing should, however, not take away entirely the significance of the announcement regarding FDI reforms. Perhaps the most direct impact on the consumers in the country would be felt by the relaxations in the retail sector. Though companies with 100 per cent FDI could open single brand stores, there was the clause that made it mandatory for them to source 30 per cent of the merchandise from India. Under the relaxed norms there is no need to disclose sourcing for first three years for products with cutting edge technology. This would enable companies like Apple to open its own signature stores.
Similarly in the food sector FDI in multi-brand food retail was prohibited but now FDI upto 100 per cent would be allowed in retail trading enabling foreign giants like Tesco and Walmart to set up dedicated foot retail stores if the items are made in India.
However, it is the in the sectors of defence, aviation and pharma that major investments are expected. Domestic airlines can now sell cent per cent to foreign investors although the cap of 49 per cent stays on foreign airlines. This could boost competition and services. In defence, the condition of access to state-of-the-art technology has been done away with while in pharma no government approval would be required for upto 74 per cent of FDI with the possibility of a sharp increase in foreign investment in the sector.
The nine key sectors had been relatively laggards in attracting FDI and together accounted for only 11 per cent of the total FDI received by India.
The BJP, when it was in the opposition, had opposed relaxations in norms and had alleged that these were a result of capitulation before the west. Times have now changed and world is a much smaller place. Even the thinking in the Left, which had been opposed to relaxations in FDI, has undergone a change. Though the usual noises over the decisions are expected, the reforms were long due and would open more avenues for foreign investment.
The government has claimed that with these relaxations, India now is “the most open economy in the world” to FDI. Although the government’s first such list of reforms in November 2015 had evoked good response, the economists are preferring to wait for the response from investors especially in view of the ouster of Rajan. The investors would like to look for stability and professionalism in handling economic issues. The appointment of the new RBI governor would be watched with keen interest.
At the same time the government shall have to ensure growth in the employment sector. Unfortunately, there has been no significant improvement in generation of employment opportunities since the Modi government took over. Although the latest relaxation of norms is expected to result in more employment opportunities, much would depend on the kind of response that the MNCs give to the new norms. The country still lags behind in the rankings for ease to do business. For that the government needs to take practical steps to create a hassle free and efficient system of governance which would effectively cut down red tape and hold authorities accountable for their actions and non actions.]]>