17.7.13

PM clears raft of FDI proposals





The government delivered on its promise to relax the foreign direct investment (FDI) regime, allowing 100% foreign ownership in the telecom sector and in defence on a case-by-case basis, but fell short of expectations raised by the Arvind Mayaram committee.
Limits in aviation and multi-brand retail remained unchanged and there appeared to be considerable discretion in defence, where even 100% FDI seemed to have been allowed in theory but only if the investment resulted in state-of-the-art technology coming into the country. The defence ministry will determine what is state of the art.
Billed as one of the fastest decisions on the policy front, from conceptualisation to final implementation, the government hopes to give effect to the decisions taken on Tuesday by Prime Minister Manmohan Singh and his colleagues after the cabinet formally approves the new FDI norms within the next few days. In sectors such as petroleum and natural gas and stock, power and commodity exchanges, the limit remains unchanged at 49% but approval from the Foreign Investment Promotion Board (FIPB) will not be needed. The FDI limits have been raised for asset reconstruction and credit information companies at a special meeting convened by the prime minister on Tuesday after a series of deliberations held by Finance Minister P Chidambaram and Sharma, who discussed the new norms with cabinet colleagues to achieve consensus before the crucial meet. The government did not bite the bullet on multi-brand retail — a political hot potato that even tested the government’s strength through a vote on the floor of Parliament last year — refusing to raise the limit to 74% as suggested by Mayaram committee.
However, Sharma promised to come out with clarifications on the norms governing investment in multi-brand retail, such as sourcing requirements, which have deterred foreign retail companies.
The government has relaxed norms for single-brand retail by allowing automatic approval for foreign investments up to 49%, but its approval would still be needed for investment over 49% to 100%. Unlike the multi-brand sector, lot of single-brand retailers have shown interest in setting up operations in India.
The reforms, part of the government’s efforts to attract stable capital flows to fund the record high current account deficit at 4.8% of GDP last year, will benefit the telecom sector the most, which has been stagnating over the last two years after the cancellation of 22 licences by the Supreme Court following the 2G spectrum scam.
Multinationals like Vodafone could now acquire 100% ownership of their ventures and the upcoming telecom spectrum auctions could see a much higher level of interest.Experts say it could attract close to $10 billion worth of investments in the long term.
The sector has so far attracted FDI worth $13 billion since early 2000. The government also approved higher 49% FDI in insurance against 26% at present, but that decision will have to be approved by Parliament, where the UPA may find it difficult to build consensus. FDI inflows fell 38% last year to $22.4 billion from $38.1 billion the year before, but Sharma said they were 25% higher in the first quarter of the current fiscal.


The government is looking for stable flows to fund its current account deficit, wiser from the recent bout of upheavals that saw foreign institutional investors pull out over $10 billion in June and July so far.
The impact on defence could be far reaching or amount to little depending on how the new FDI policy is implemented on the ground. Briefing the media, Sharma said all Foreign Direct Investment (FDI) proposals beyond 26% would be considered by the Cabinet Committee on Security, indicating it could even go up to 100% if it allowed India to access state-of-the art technology. Indian private companies can invest 100% in some areas of defence production.
The cap for civil aviation, one of the keenly watched sectors given the recent spate of investment proposals, has been retained at the same level of 49% for now given that related issues like seat sharing and control of companies are still under discussion.
The proposal to allow higher foreign investment in media and television companies have been held back for now.
A decision will be taken after due consultations with Trai and Press Council of India. The lack of action on some of these crucial sectors seems to have taken the sheen off what has been billed as a big bang change.
Opposition parties were not impressed.

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