India's FDI policy

In a globalized world today, India’s growth story is intrinsically linked with the story of both Indian entrepreneurship and Foreign Direct Investment (FDI). India’s strong fundamentals of stable macroeconomic and political regime, strong institutions, geographical advantage, and the growing aspirational middle class with appetite for consumption have made India one of the preferred destinations for global investment, full potential of which is gradually being unleashed. UNCTAD and Ernst & Young (EY) have included India in one of the top five attractive locations for investment. Japan Bank for International Cooperation continues to rate India as top most promising country for overseas business operations. FDI policy and procedures of a country can deliver results within the boundaries of the sectoral policies and procedures, and it is here that the holistic policy liberalization in the last one year has brought in the maximum thrust. It is not surprising that OECD has termed India’s FDI policy regime today as more liberal than the FDI policy regime in China. According to the Advance Estimate of Central Statistics Office (CSO), India grew at the rate of 7.4 per cent in 2014-15, against 6.9 per cent growth in 2013-14, at the revised base year of 2011-12. IMF’s World Economic Outlook estimated in April 2015 that India will grow at the rate of 7.5% in both 2015 and 2016, which not only mark upward revisions from January estimates, but also mark the highest positive revisions in magnitude among the various economies done by IMF. So what has changed in the last one year? When the present Government had taken over, FDI was allowed up to 100% in almost all sectors, and in most of the cases, through the automatic route. However, permissible FDI in certain crucial sectors were restricted due to statutory restrictions in those sectors. These were Defence, Railway, Insurance, Pensions, the sectors conventionally controlled by the Public Sector due to historical reasons. Unless the relevant statutes were amended facilitating private investment, FDI in those sectors could not come in. In the first year of the Government, relevant Statutes were amended on priority in these sectors, paving the way for FDI induction and also conveying an overwhelming message about seriousness of the Government about inviting FDI. In the last one year, the Government has taken a number of measures ranging from policy correction to major policy reforms. The permissible FDI limit in the Defence sector was increased to 49%, FDI up to 100% was permitted in Rail infrastructure, norms pertaining to FDI in Construction Development were liberalized, FDI in medical devices were exempt from sectoral restrictions of pharmaceuticals, FDI in insurance sector and pension sector were permitted up to 49%. A lot of thought had gone into these policy liberalization measures, while keeping India’s security and social sensitivities fully protected. • Indian Railways is one of the largest railways network in the world carrying 22 million passengers every day and carrying 923 million tonnes of freight a year. Modernisation of Railway infrastructure is a priority. Rail Budget 2015-16 has projected an investment plan of Rs 8,56,020 crore in the next five years, and in this FDI can play a very crucial role. Modernization of railways can be a significant engine of inclusive growth and development for the country and can potentially contribute an additional 1.5% to 2% to GDP. • India ranks among the top ten countries in the world in terms of military expenditure. However, nearly 70% of the defence requirements are met through imports. If even a portion of defence requirements can be met through indigenous manufacture facilitated by FDI, India would save valuable foreign exchange and the manufacture in Defence sector would both contribute to GDP and give a significant thrust to employment generation. • Investment in the construction development sector has a multiplier effect on the economy by way of infrastructure creation; substantial employment generation over the entire spectrum from unskilled workers to engineers, architects, designers as well as financial and other supporting services. Besides its employment and income generation potential, greater investment in the sector would help to augment the available housing stock including affordable housing which is an urgent need in order to stem the proliferation of slums in and around the cities. This consideration led to easing the norms of FDI in this important sector. • India is known as the pharmacy of the world with almost 50% of its products going to exports. Strengths of the Indian pharma sector are high quality and affordability, however, India imports almost 70% of its requirement of medical devices. It was identified that applying the sectoral restrictions governing pharmaceutical also to medical devices which was a distinctly different supporting industry, was fettering FDI inflow. For bringing in reforms for availability of much needed capital and technology for this important industry, the norms for FDI in medical devices were liberalized. • Bold reforms were needed in services sector also. In order to extend insurance cover to its large population the Government has increased the FDI limit in insurance sector to 49%. However keeping in view the sensitivity of the sector it is mandated that that the insurance company will be under Indian management and control. Similar provisions have been made for the pension sector as well. In addition, the procedure of granting approvals has also been liberalized. For up to Rs 3000 crore of FDI proposal for the sectors/activity requiring approval through Government route, the Foreign Investment Promotion Board (FIPB) has been delegated the power to take a decision. Earlier, FIPB could take decisions only for FDI up to Rs. 1200 crore, and proposals beyond this level needed approval from the Cabinet Committee of Economic Affairs. Further, the process of application for FIPB approval has been digitized through an on-line portal, and FAQ has been provided for investor facilitation. ‘Invest India’ is providing handholding services from answering queries to actual facilitation. But how have the foreign investors reacted to these investor-friendly thoughtful initiatives? The statistics speak for themselves: • During April-February 2014-15, FDI equity inflow was $ 28.81 Billion, marking an increase of 38.75% over the FDI equity inflow of 20.76% during the same period in 2013-14. • In the above, a growth of 39.79% in the FDI equity inflow has been recorded for the period of June, 2014 to February, 2015 as compared to the corresponding period of previous financial year. • In particular, considering that ‘Make in India’ initiative was launched globally on September 25, 2014, the total FDI equity inflow received in the manufacturing sector during October, 2014 to February, 2015 is US$ 6916.99 million. It shows an increase of 44.98% compared to corresponding period of previous financial year i.e. October, 2013 to February, 2014 (US 4770.94 million). • During the period of June 2014 to February 2015, key sectors which have shown growth in FDI are Telecommunication, Petroleum & Natural Gas, Miscellaneous Mechanical & Engineering Industries, Electrical Equipment, Automobile Industry, Drug & Pharmaceuticals, Electronics, Industrial Machinery, Computer Software & Hardware and Non-Conventional energy. PIB