FDI: The key to ‘Modinomics’

The Indian government has been very keen to attract FDI and ease the investment regime to fast-track economic growth. It is offering a mix of policies and processes to improve the environment and is simultaneously focusing on boosting sentiment to ensure revenue-led growth. To this end, the Union Budget has liberalized FDI policy in several sectors. A process for single window clearances has been put in place to simplify procedures. Several statements by senior political leaders and bureaucrats have highlighted the Government’s intent to attract FDI. 

In these early days, the FDI focus is on track. The Government has focused on sectors that have the potential to attract large volumes of investment in a shorter time frame – either because the sector is ripe for investment or because FDI has been under consideration for a long time.

The sectors that have witnessed significant changes include: 

Railways:

• The government has announced an increase in the FDI cap. It is up to 49 percent through the automatic route and up to 100 percent on a project-specific basis. 
• The Union Cabinet is expected to approve the decision in the coming week.
• Following this decision, foreign firms can undertake projects in areas such as high-speed train systems, suburban corridors, dedicated freight line projects and in construction and maintenance of rail lines. 
• It is estimated that the move to inject FDI in railways could attract up to $10 billion of foreign investment over the next five years. 

Defense:

• The FDI cap in defense has been increased from 26 percent to 49 percent, ahead of expectations from the business community. 
• The decision to allow FDI in this sector and promote indigenous production of weaponry is expected to reduce the trade deficit by avoiding the loss of foreign exchange on imports of defense equipment.
• India currently imports 70 percent of its defense equipment and spends $8 billion on these imports.  

Insurance:

• The FDI cap in the insurance sector has been raised from 26 percent to 49 percent through the Foreign Investment Promotion Board (FIPB) route. 
• The Cabinet has approved these amendments for the bill to be taken up soon in the parliament.
• Increasing the FDI cap is likely to bring around $20 billion in the insurance sector over the next three to five years.  

Retail:
Multi-brand retail:

• The Modi government has decided not to repeal the UPA's policy for FDI in multi-brand retail.
• Despite opposing FDI in multi-brand retail when in opposition, NDA has been reluctant to change the UPA policy after coming to power. This is possibly a move to ensure that the government continues to maintain its relationship with the trader vote bank, while simultaneously fostering positive sentiment around investment and policy stability. 

Single-brand retail:

• The Modi government is also reviewing a plan that will allow single-brand retailers to bring in sub-brands or sell under different trademarks. This is likely to be most beneficial to clothing, electronics and various luxury brands.
• Unverified media reports suggest that the Department of Industrial Policy and Promotion (DIPP) is considering scrapping the 30 percent domestic sourcing clause in single-brand retail which was a sticking point for foreign investors in the retail sector. 

FDI in retail has the potential to attract investments around $8 billion worth of investments.

E-Commerce:

• The decision to allow FDI in e-commerce for business-to-consumer (B2C) is on the back burner now. 
• The public view that allowing FDI in B2C e-commerce will imply a back-door entry into multi-brand retail was the primary stumbling block. 
• The budget announcement has clarified, however, that foreign companies with manufacturing units in the country can now sell their products online. 

In defense and insurance sectors, the government has reiterated that despite the increase in FDI cap from 26 to 49 percent, the management and control of the enterprise will “remain in Indian hands.” This declaration is intended to manage public opinion and prevent possible political backlash against increasing the FDI cap. 

This government’s focus has been to find optimal ways to achieve fiscal consolidation, spur investment and foster growth without impacting the common man with subsidy cuts and tax hikes. Disinvestment and FDI are hence key priorities. Further, due to a lack of domestic investment and the infusion of capital from Indian banks, the government will look to attract FDI until domestic growth revives. We expect the government to liberalize the FDI policy in several sectors and raise investment caps albeit in a phased manner in the medium to long term.