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Economy

These FDI Reforms Look Like They've Been Borrowed From Sergei Bubka's Playbook

FDI-Reforms.jpg

FDI Reforms

Yesterday the Department of Commerce brought about some “Radical” changes to the FDI Regime. Here is a quick summary of the changes: (See PIB release)

100% FDI for Food Trading, ButOnly Under Approval

Food Products manufactured/produced
in India
– if the food products are manufactured or produced in India, then a 100% FDI would be allowed with government approval route for trading, including through e-commerce.

This means that supplying food by first buying it and then selling it (versus being a marketplace connecting sellers and buyers) can have 100% foreign investment, but only in the approval route. Meaning: they have to take approval from FIPB before such investment is made. Companies like Bigbasket – which buy veggies, fruits and other such food items – will probably need FIPB approval for further investment – but hey, it already has foreign investment so one doesn’t really know whatthe point is.

Foreign Investment in Defence Sector: Removed “State of the Art”

Till now, Defence FDI was only till 49%. Foreign investment beyond 49% is also permitted through government approval route, but only if there’s “state-of-the-art” technology involved. They’ve removed the “State of the Art” wording, so you can get FDI with crappy technology also.

However, since it’s with an “approval” this is just another pain point and I’m sure no one will be allowed to bring in more than 49% FDI into what is not top class defense technology. But this does allow FDI into things like ammunition where there isn’t that much need for top class technology. 

Companies like M&M and Bharat Forge may benefit from this.

DTH, Radio, News Channels Get More FDI

You will be able to get foreign investment into new DTH companies, Cable networks, Mobile TV etc. The limits are up to 100% from 74%. 

Radio channels too see an increase in FDI from 26% to 49%, just as round 3 auctions come about for stations.

And then news channels get to have 49% FDI (from 26%). 

This is good for the broadcast media sector in general, mostly because no approvals are required. FIPB is a black hole. 

Pharmaceuticals: No Approval Needed For Upto 74%

New pharma plants have 100% FDI in Automatic route anyhow, but existing pharma companies need approval at certain levels. Now even existing companies get “automatic” FDI (no approval needed) uptil 74%, and only beyond that is there a need for approval.

Brownfield Pharma is when investment is made in an existing plant through merger and acquisitions. Greenfield Pharma is investment in new plants i.e. establishing new production

Civil Aviation Sector: 100% FDI, No Approval Needed

  • Permit 100% FDI under automatic route in Brownfield Airport projects from the earlier 74% . Good perhaps for GVK and GMR, but they aren’t going to give up full control. Allows them, of course, to sell.
  • 100% foreign investment with FDI up to 49% permitted under automatic route and beyond that, on goverment approval, into airlines. NRIs however need no approval. (This is good news for Air Asia which can now bring in more capital and challenge more routes)
  • Foreign airlines would continue to be allowed to invest in airlines upto 49% only.

Single-Brand Retail: Lower Sourcing Restrictions

A single brand retail company (like Apple) now needs about 30% of its inputs from local markets in India. This will no longer be required for the first three years, and then for five years more, they will relax it some more. But this is only for “state of the art” and “cutting edge” technology product companies.  Meaning: IKEA doesn’t get in. Also, Apple still can’t sell refurbished phones directly. 

Tinkering with approvals, and Others

Private Security Agencies – While the limit’s still at 49%, above 49% you can request approval for upto 74%.

Establishment of branch office, liaison office or project office – if the principal business of the applicant is Defence, Telecom, Private Security or Information and Broadcasting, and if it already has FIPB approval then they don’t need further approval for branches. 

Animal Husbandry – There was a phrase called 100% FDI under “controlled conditions”. Since no one understood what that meant (we think), this “controlled conditions”  clause has been removed.

Our View

This is not big news.

The only thing good is that someone can sell an airport entirely to foreigners. Or that Pharma promoters can sell 74% now without approval. 

Adding clauses like “state of the art” and stuff like that doesn’t ease things at all. 

According to us, India should have only one thing: Automatic route FDI. You shouldn’t need approvals of anyone. Either you are allowed, or not allowed. You can have sectoral limits of 49% or 74% or such, but there should be  a path to 100% for most industries. 

This is not going to happen, because no one likes to give up their power. So we will have to live with an FIPB refusing to approve things for flimsy reasons, forever. But yeah, this is considered “FDI reform”, so we’ll go with that.

It’s increasingly evident that we will only get Sergei Bubka reforms rather than something that really opens things up. Bubka was a top pole-vault athlete who was compensated for making a new world record (sponsors and organizers). So while it was apparent he could vault significantly higher, he chose to add just one centimeter to the record to maximise his return. He’s still a champion. But to translate this into economic reform, emulating him by doing small tiny changes and trying to maximise public attention on each step is, as a public policy observer, quite frustrating. 

It’s no longer what they do. It’s how much they emphasize what they do. From one party naming things behind their royal family, to another putting posters of Delhi achievements in Tamil Nadu, to a third highlighting piecemeal reform, let’s just surrender and agree that these are superior mortals and everything everyone does is legendary.