India liberalises FDI regime

Ahead of prime minister Narendra Modi’s visit to the World Economic Forum Annual Meeting at Davos this month, his cabinet has approved a number of amendments to India’s FDI policy. These amendments are intended to signal the country’s attractiveness as an investment destination. They include 100% FDI under the automatic route for single-brand retail and construction development; foreign airlines allowed to invest up to 49% under approval route in the nation’s flagship carrier, Air India; foreign institutional and portfolio investments (FII/FPI) allowed to invest in power exchanges through the primary market; and last, the definition of ‘medical devices’ amended in the FDI policy.

In the case of single-brand retail, the earlier policy only allowed 49% FDI under the automatic route and up to 100% with the government’s nod. There was also a mandatory local sourcing norm of 30% that was a sticking point for many global retail giants. The latest change raises the FDI limit and allows retailers to offset the value of goods sourced from India for their global operations against the sourcing norm in the first five years. This benefits companies like the Swedish furniture giant Ikea and fashion retailer H&M and they expect the relaxation in sourcing to extend beyond five years. 

The big change in the FDI policy pertains to allowing foreign investments in Air India. Hitherto, foreign airlines were only allowed to take a 49% stake in Indian carriers barring the national flag. However, even with the new change, substantial ownership and control will remain with Indians or a local joint venture partner. The union cabinet has already taken a decision to sell off its stake in Air India and a roadmap is expected to be announced after the budget is presented on February 1. Potential foreign investors are bound to scrutinise the bid conditions closely as Air India is haemorrhaging financially and has a huge debt burden. 

Allowing 100% FDI under the automatic route in real estate broking is expected to encourage start-ups. In the case of power exchanges, the earlier policy allowed 49% FDI under the automatic route. However, FII/FPI purchases were restricted to only the secondary market. Now, they can invest in through the primary market as well. These amendments are intended to “liberalise and further simplify the FDI policy so as to provide ease of doing business in the country”, according to an official statement.

N Chandra Mohan is an economics and business writer based in New Delhi.