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BW Businessworld

FDI: Opening The Floodgates

To encourage growth and jobs, the government relaxes FDI norms in sectors such as single-brand retail, aviation, security sector, pharma, defence-related sub-sectors and many more

Photo Credit : Subhabrata Das

When the Narendra Modi regime completed two years recently, one could see both well wishers and critics wondering why the man who promised development and jobs had been so diffident when it came to policies that could bolster growth and jobs. Perhaps stung by this (and also the fact that no substantive growth and job creation had happened despite high-profile policies like Make in India, Skill India, Smart Cities and Startup India), the government recently liberalised foreign direct investment (FDI) norms for a whole slew of sectors.

Some of the sectors that have seen a dramatic relaxation in FDI norms are: single-brand retail (30 per cent local sourcing rule largely revoked), aviation (100 per cent FDI if the source is not an airline), 100 per cent FDI in defence-related sub-sectors like small arms, 100 per cent FDI in the security sector, 74 per cent FDI in the pharma sector, relaxed norms for the food processing sector, including animal husbandry and many more. Predictably, it has excited pundits, who were beginning to give up on this government on implementation of bold, reformist policies. Last year, India attracted a record FDI inflow in excess of $51 billion. Analysts reckon that the day is not very far off when annual FDI inflows will cross $100 billion. The latest policy announcements will help.

Take the aviation sector for example, which needs a massive dose of expansion across hundreds of smaller towns and cities in the country. “Given the rate at which its global and domestic air connectivity has to be expanded, India needs to open its doors to foreign capital. It will boost growth, competition, tourism and jobs. The existing airlines have expansion plans, but that is likely to be limited to the top 50-60 cities in the domestic sector, says Amber Dubey, partner and head of Aerospace and Defence at KPMG.

The government has simultaneously launched an ambitious new policy to connect all Indian cities through air services. Civil aviation analysts estimate that as many as 150 more cities could be connected in the next few years. It helps that FDI norms for airports and air cargo services too have been relaxed. As recent history shows, the civil aviation business is capital intensive and prone to failures.

While aviation is a high-profile and glamorous sector, even the more mundane sectors like security services are excited by the relaxation of FDI norms. Of course, there is a healthy dose of cautious optimism in the Rs 40,000-crore a year industry, which is estimated to double revenues in five years. “While the opening up of FDI in the security sector comes as a welcome step in real terms, the government needs to amend the Private Security Agencies Regulation (PSAR) to facilitate foreign capital inflow into the sector,” says Rituraj Sinha, promoter of Delhi-based SIS group, one of the pioneers in the security services space that started as a man-guarding firm in the early 70s.

The massive expansion in the sector is also expected to create millions of jobs — even if it means semi-skilled — for the masses over the next few years. As per a Grant Thornton-Ficci study, the private security industry in the country is expected to generate around 50 lakh additional jobs by 2020. Currently, around 70 lakh people are employed in this sector. This is particularly good news for a country like India, where the requirement of semi-skilled executives is also significant.
Arguably, the maximum excitement as well as controversy revolve around relaxation of FDI norms in the defence equipment sector. The usual suspects have slammed the Modi regime for “selling out” India to foreign powers and vested interest. But the fact is despite almost seven decades of “self reliance” and indigenous technology, India continues to be one of the largest arms importers in the world. Allowing and encouraging FDI in this sector could change the equations.

“Reflecting a positive intent of India’s policy makers, the government has literally opened the floodgates for FDI by easing the norms. Showing robust signs of vibrancy it has removed the conditions of domestic access to state-of-the-art technology for 100 per cent FDI in the defence sector and put in abeyance the fractious 30 per cent local sourcing norms for FDI in single brand retail of advanced technology products,” says Aravind Melligeri, chairman and CEO of Aequs. The precision engineering company manufactures components of Airbus.

The logic seems impeccably rooted in hard realities of the arms business. Global original equipment manufacturers (OEMs) can never move their entire eco-system here, along with vendors and suppliers. Just like the auto and consumer durables industry, global OEMs will have to depend on well-established and reputed Indian OEMs for components and services. Over time Indian OEMs themselves can become world beaters in niche technologies.

“It’s a significant move by the government aimed at speeding technology research and development (R&D) and shortening project times for several defence projects. In my view, this move will facilitate higher FDI inflows and technology transfer. The benefits will accrue over years as investments, income and employment grow in Indian defence. This is just the beginning,” says Kaustubh Nande, country marketing head at ANSYS. Cooperation with Israeli defence equipment companies is an example of how FDI in defence equipment is a win-win for India.

The food and retail sector, too, seems encouraged by the recent policy moves. Big multinationals ranging from Walmart to Ikea have been fighting a prolonged and pitched battle with domestic lobbies. The new policy measures imply a small victory for them. “This progressive decision by the government to allow 100 per cent FDI under government approval route, including through e-commerce in trading of food products manufactured, or produced in India, is far reaching. It will help in reducing wastage, helping farm diversification and encourage industry to produce locally within the country. This far-reaching reform will benefit farmers, give impetus to food processing industry and create vast employment opportunities. We welcome this reform by the Modi government,” says Rajneesh Kumar, senior vice-president & head, Corporate Affairs, Walmart India. However, certain analysts believe there will be limited impact for the indigenous companies and will prove to be less profitable for the foreign players. “Food is a lower margin business, there will not be many takers for this proposition, and many states are not very keen on the opening up of FDI in retail. Investors will have to find it attractive otherwise it will not be a big chunk of earnings for them,” says Abneesh Roy, associate director, Wholesale Capital Markets at Edelweiss Financial Services.

After two years of relative timidity, the slew of measures has indeed excited supporters of the Modi regime. But two factors need to be kept in mind before a standing ovation. The first is how India improves in terms of ease of doing business. If there is a genuine cut in red tape and cronyism, along with improved infrastructure, the FDI inflows will happen. The Modi government has set a target of moving into the top 50 in ease of doing business rankings. Currently, India ranks below 100. This will be perhaps more important than tweaking of FDI norms.

Second, sustained growth and job creation cannot happen with FDI alone. Domestic investors too have to pitch in. Look at it this way. India attracted a little more than $50 billion, which is less than 2.5 per cent of the real GDP of India in dollar terms and about 10 per cent of the gross investment in the economy. FDI is good. But even better are Indian investors, who still seem to be slumbering.

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(With inputs from Paramita Chatterjee, Monica Behura & Haider Ali)