India’s Modi Government Pulls Out All Stops to Lure Foreign Investors

The revolutionary investment policy permitting 100 percent foreign ownership in crucial sectors that is being introduced by India’s Narendra Modi-led BJP government is a sea change that goes against decades of protectionism for some of the country’s flagship industries.

The new policy raises questions whether in fact it can be fully implemented in the face of entrenched interests that have fought fiercely against opening the country to unfettered investment, arguing it would do irreparable damage to local manufacturers and merchants.

The new rules allow full ownership in sectors including single brand retail trading (SBRT) and aviation.

Liberalized rules have also been ushered in fields such as construction, power exchanges, medical devices and audit firms associated with companies receiving overseas funds although multinationals are likely to balk at rules that give them only 49 percent ownership and not control, which excludes them from setting investment policy.

The cabinet approved 49 percent ownership in the national carrier Air India amid plans for disinvestment by the government in the beleaguered airline and to attract bidders for it. Overseas carriers will also be allowed to invest with government approval in other Indian companies operating scheduled and non-scheduled air transport services, up to 49 percent of their paid-up capital. Earlier Air India was excluded from this provision. The current liberalization will facilitate ventures such as Tata-Singapore Airlines and other domestic carriers to rope in foreign partners to bring in more funds.

The sweeping changes for retail companies are designed to lure significant foreign brands into India’s promising retail space, say analysts. That is because the new policy allows automatic 49 percent foreign investment and FDI beyond that and up to 100 percent with government approval. Earlier, a sourcing norm was also attached to such investment. It was mandatory for investors to source 30 percent of the value of goods purchased for their Indian businesses through local sources. This severely inconvenienced companies, which had to invest significant money and time in developing a network of good local suppliers as partners.

However, the new amendment helps investors enter the Indian market without having to seek approval. It is anticipated that cash-rich global giants such as Apple, IKEA and Xiaomi, eager to make their forays into one of the world’s biggest markets, with a middle class expected to more than double to exceed 500 million by 2025, will undertake large investment projects under the revised regime. Setting up their own stores will also help these behemoths engage closely with customers and establish a toehold in the brutally competitive Indian retail industry.

While allowing Indian consumers better access to international products, the new sourcing norms will give international retailers flexibility as well as more time to develop vendors in the country and establish a supply chain for their Indian operations.

Foreign trade bodies feel that relaxed FDI norms augur well for both India as well as investors. "Steps such as FDI reform will encourage foreign investors and allow India to realise its dream of becoming one of the world's most powerful economies," US-India Strategic Partnership Forum Chairman John Chambers said in a statement. Bold steps are required to make effective change in India which holds vast potential, he added.

Tax and audit major Deloitte said that investors in the retail sector will "refresh" their India investment plans. Dhanraj Bhagat, a partner with Grant Thornton India told an Indian daily that the move will foster ease of doing business in India, encouraging international brands to look at India "seriously" as an investment destination as the amended sourcing norms will make it "viable for them to comply with the regulations.”

The Union cabinet's FDI decision synchronizes with Modi's upcoming visit to the World Economic Forum meeting in Davos, Switzerland, later this month where while hobnobbing with CEOs of top multinational companies, he will pitch India as a great foreign investment destination.

Unlimited foreign investment, say its advocates, is one of the things that has underpinned the US economy. Southeast Asian countries – particularly Taiwan, Malaysia, Thailand and Singapore – allowed Japanese investment that triggered a huge burst of productivity and economic growth in the 1980s in all three countries. By contrast, the ones that didn’t – the Philippines, and Myanmar at the bottom of the list – suffered and continue to suffer today. Similarly, China allowing the multinationals in led to its exponential development while India's refusal to allow foreign investment has hampered its development. So its high time New Delhi welcomed capital inflows from overseas.

However, critics regard the euphoria over the new FDI norms as misplaced as the move rarely facilitates job creation and growth, they say. Also, they ask, what about reciprocity from developed countries? Will they too open their markets to India, especially for the country's agricultural products or pharmaceutical drugs or movement of IT or medical personnel to their countries?

"The kind of FDI which is coming in should also be scrutinized by the government because it may not be the type which establishes greenfield enterprises that employ more labor. This kind of FDI was encouraged in the past because it brought in transfer of technology and knowhow. The recipient country benefited from the foreign exchange that investors brought which improved the balance of payments," wrote economist Jayshree Sengupta in The Tribune newspaper.

Sengupta feels the potential of FDI in creating jobs is limited. Nor, he says, does it bring in new technology or add to capital formation. "The recent FDI inflows are not from leading global producers of goods and services but mainly from private equity funds. In 2014-15 private equity funds like the Canada Pension Plan Investment Board accounted for 60 percent of total foreign inflows and went to consumer retail like Snapdeal, Paytm and Flipcart (e-commerce) that are heavily import-dependent in their operations. Today, Amazon is waiting to come in with US$5 billion capital to increase its presence in India," she writes.

Trade analyst Prateek Sabharwal adds that FDI often also creates market inequities. "Foreign investors usually rush to Mumbai, New Delhi, Chennai and big metros, ignoring smaller cities. Very few show interest in tier two and three cities even though they are the ones who need it most and that's where exponential growth is too. This is the demographic that needs training in skills, education and healthcare to help them become a disciplined, dependable workforce to spur growth. Also one needs to be circumspect about where FDI is located. This can be a crucial determiner in accelerating growth and creating jobs."

There's outright rejection of the government's FDI move too. The Confederation of All India Traders says the move will facilitate easy entry of multinational companies in retail trade which will decimate local players. The organization has termed the move as a "serious matter for small businesses" that will hamper the welfare, upgradation and modernisation of existing retail trade and render a large number of people jobless.

Neeta Lal is a New Delhi-based editor & journalist and a long-time regular contributor to Asia Sentinel