The Narendra Modi government in India announced sweeping reforms to Foreign Direct Investment (FDI) rules on Monday, clearing the way for foreigners to invest more in different sectors, including defence, civil aviation and pharmaceuticals.
Indian Commerce and Industry Minister Nirmala Sitharaman made the announcement a couple of days after Raghuram Rajan made clear that he won’t be seeking another term as the governor of Reserve Bank of India (RBI – India’s Central Bank). However, the minister stressed that the government’s action had no relation with the RBI governor’s decision.
Speaking at a press conference in New Delhi, Sitharaman said that the government decided to allow 100% FDI under its approval route for trading, including through e-commerce, in respect of food products manufactured or produced in the country and permitting up to 100% FDI in defence sector. She claimed that some other sectors, like the broadcasting, pharmaceuticals, civil aviation and single brand retail, would also enjoy the benefits.
As far as defence sector is concerned, FDI beyond 49% (and upto 100%) has been permitted only through the government approval route, in cases resulting in access to modern technology in India. At the same time, the Modi administration tightened rules for companies, producing items with cutting-edge and state-of-art technology, by giving them only a three-year blanket exemption from the 30% local sourcing norm over and above the five years. According to the minister, the 30% procurement requirement will have to be met as an average of five years’ total value of the goods purchased. She told the press that the rule would help the government ensure that foreign companies manufacture in India rather than making profits through just trading activities.
Sitharaman met the press a week after a high-level meeting, chaired by Prime Minister Modi, made a final decision on FDI reforms. She informed the media that the government would allow 100% FDI also in India-based airlines. However, a foreign carrier can only own upto 49% stake in the venture and the remaining 51% could come from a private investors, including those based overseas. This move is expected to bring in more funds into domestic airlines. To boost airport development and modernisation, 100% FDI (from the current 74%) in existing airport projects has been allowed without government permission.
Meanwhile, Prime Minister Modi expressed hope that his government’s FDI reforms would give a boost to employment, job creation and benefit the economy. According to the PM, the government makes India “the most open economy in the world of FDI” by easing investment norms in nine sectors. Outgoing RBI Governor Rajan explained that India was making preparations for Brexit by monitoring markets. “We will take whatever it requires to moderate market volatility,” he said. Claiming that the government’s move will soothe investors’ nerves, Rajan stressed that Argentina, Brazil and Venezuela tried unorthodox policies with depressingly orthodox consequences. “We had gotten used to decades of moderate-to-high inflation, with industrialists and governments paying negative real interest rates and the burden of hidden inflation tax falling on the middle-class saver and the poor,” the governor told reporters.