By Arsh Rampal
The Union Government has eased the norms for Foreign Direct Investment (FDI) in India. The changes have been brought for key sectors such as retail, civil aviation & power exchanges. The move has come a few weeks before Prime Minister Modi is set to address global investors at the Annual Davos World Economic Forum.
Change in FDI policy
Under the new policy, foreign companies can invest up to a 100% through the automatic route in single-brand retail trading (SBRT). Before this change, foreign companies were allowed to invest only up to 49% through this route. An approval by the government was required for additional investment. SBRT entities can also set off their incremental sourcing of goods from India for global operations for the initial five years beginning April 1 of the year in which the first store is opened in India. The mandatory sourcing requirement of 30% of purchases from India now applies after the 5 year period which earlier used to apply from the first year itself.
Earlier foreign companies could take up to 49% stake in Indian civil aviation companies with government approval. This rule, however, was not applicable to Air India. As per the new policy, foreign companies can now invest up to 49% in Air India subject to government approval, however, substantial ownership and effective control of Air India is to remain with an Indian national. This move helps widen competition for the purchase of Air India.
Similar changes have been brought about in the pharmaceutical, construction, auditing and real estate services. The government has also released a clarification that real-estate broking service does not amount to real estate business.
Why it matters?
The Modi government has consistently made efforts to increase foreign investment in India. The new changes can help achieve the same. The changes in the FDI policy will prove extremely beneficial and boost the success of the Make in India project started by the government. The removal of government approval for investment in a majority of sectors will encourage more investment by foreign companies. It will also help hasten the process of investment which is beneficial for the investor companies.
The move will not only help encourage and bring in more investment into the country but can also help increase employment. As it becomes easier for foreign companies to conduct business in India, the employment opportunities for skilled labour are expected to increase. In the present scenario where employment seems to be one of the biggest economic issues for the Modi Government, the new rules can help improve the situation.
Future Outlook
With the current policy measures being taken up by the Government, it seems that the focus is on encouraging business by the MNCs. The measures being undertaken are expected to increase investment and employment, however, they will also impact the small and medium-sized domestic businesses operating in India. The consecutive liberalisation measures can have a huge impact on the domestic sector affecting employment and market competition gravely. The policy measures seem to be much more beneficial to large businesses and MNCs and the government needs to evaluate its decisions to maintain a balance in the market.
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