JOIN USForeign Direct Investment (FDI), in laymen’s terms, allows foreign companies to establish their businesses in the host country. This can be done either through wholly-owned subsidiaries or joint ventures with host-country companies. In India, foreign investors with ownership of at least 10% equity in an Indian company qualify as FDI. With this provision, investors also get voting rights and thereby have a say in management.
In an economy like India, where the saving-investment ratio is low, inflow of FDI is expected to raise the level of investment in popular sectors, such as retail and even the in not-so-popular sectors like animal husbandry, security services and broadcasting carriages. This investment will in turn spur growth and employment through capital building, but, more importantly provide access to modern technology for making quality products. In addition, it will promote the ‘Make in India’ initiative to give a boost to the manufacturing sector.
Opening doors
The norms for FDI in single-brand retail have been relaxed such that local sourcing requirements can be bypassed by high-tech foreign companies with ‘cutting edge technology’. The revised norms would open the doors for foreign companies such as Cupertino-based Apple and Chinese smartphone maker LeEco. However, ‘cutting edge technology’ remains open to different interpretations.
A three-year delay to start local sourcing sounds fair enough for foreign brands. This way, local technology and manufacturing will not be adversely affected and at the same time, it will not hamper its own growth. The impact of this change is likely to be minimal as single-brand retailers won’t generate any jobs in the SME sector, which employs 40% of India’s workforce. It is expected to boost consumption-based growth.
FDI norms have been relaxed in animal husbandry by doing away with the clause of ‘controlled conditions’ in pisciculture, acquaculture and apiculture. With the removal of this restricting clause, foreign genetic companies would be willing to set up base in the country that would help in increasing yields and improve animal breeds.
This paves the way for 100% FDI through the automatic route for foreign research and development (R&D) agencies that were hitherto unwilling to bring in new technology sans investments.
For instance, aquaculture, whose produce is mostly for foreign markets, technology dissemination from foreign firms would not only aid domestic players in lowering production costs, but also make their products globally competitive.
The bulk of seafood exports consist of frozen aquaculture shrimps. While the shrimp farms are mostly located in the coastal states of Andhra Pradesh and Tamil Nadu, they procure the brood stock for seeds from the firms in the US. If these foreign firms are allowed to set up shop, they will be able to establish brood stock multiplication centres in the country, which will bring down the import bill of the domestic shrimp farms.
Similarly, for milch animals, by allowing foreign players to become investors, it is likely that they will be willing to share technology that will help milk producers and farmers. For example, milk production could be increased manifold if we could get technology, whereby only female calf is produced.
Other relaxations
As part of a broader plan, the FDI norms have been liberalised in broadcast carriage services like teleports, cable TV, DTH, HITS and mobile TV. The government had raised the foreign investment limit for DTH, cable networks and HITS to 100% from 74%, noting that only 49% FDI was allowed through the automatic route. This implies that direct-to-home (DTH) operators, cable network companies, headend-in-the sky (HITS) operators and mobile television operators can now raise 100% FDI without seeking approval from the Foreign Investment Promotion Board (FIPB).
This decision will help several new international players to enter the country through the automatic route. This will also make it easier for international investors to make an entry into these sectors and help attract investments quicker. The new FDI policy is expected to open up fiscal and tax incentives for cable networks and would bring relief to cable industry which is struggling under the process of digitisation as pushed by the government in the last few years. Most importantly, the government should address real operational and regulatory concerns as well as the proper valuation of cable and DTH to attract more FDI inflows into this sector.
For private security services, the FDI cap has been increased from 49% to 74%. These agencies can bring in 49% FDI under the automatic route. Beyond 49% and up to 74% would require government approval. This is a remarkable change from the existing policy. However, for implementing the changes would require amendments to the PSAR Act (2005). The proposal will, however, bring in investment into areas such as training, equipment and even ownerships.
The government’s move to liberalise foreign investment will improve investor sentiment and attract and promote FDI for accelerated economic growth in the longer run. While the initiative of the government needs to be applauded, certain clarifications are still required to be provided with respect to the some amendments to the FDI policy. For example, what would constitute ‘cutting edge’ for single brand traders remain to be seen, as the terms have not been defined yet and clarity with respect to the same needs to be provided.
(The author is an Assistant Professor of Economics and Public Policy at Indian Institute of Management -Tiruchirappalli)