#dnaEdit: Modi govt's ambitious FDI push

The big-bang Foreign Direct Investment (FDI) norms approved by the government on Monday are premised on giving a boost to employment, manufacturing and exports. The government is clearly banking on FDI to kickstart the economy at a time when domestic players have disappointed. Domestic production and exports are flagging, bank assets are under strain and priority sector lending has not picked up speed. In the past two years, the government has progressively liberalised FDI norms in pension, insurance, construction, defence and other sectors but their impact on the economy has been minimal. Though the government claims that FDI inflows have increased to $55 billion in 2015-16 from $36 billion in 2013-14, the weak demand in the global economy has clouded the Make in India campaign. According to fdiMarkets, a data service of the Financial Times, India surpassed both China and the United States in attracting FDI for greenfield projects. However, FDI in greenfield projects will take time to mature and the implications of the FDI policy will be felt down the road.

For two decades now, India has moved cautiously on relaxing FDI norms in the belief that a quick relaxation of FDI norms would disadvantage domestic producers and force them to sell out to foreign players. The cautious FDI policy has been counterproductive, except in pharma where India can truly boast of a robust domestic industry which supplies cheap drugs to the poor and developing countries. Not surprisingly, much of the FDI inflows into India in recent years have involved mergers and acquisitions of brownfield pharma companies. In civil aviation, Indian companies like Kingfisher and Jet Airways have for long lobbied for a liberalised FDI regime but their pleas fell on deaf ears. In the interim, Kingfisher, in desperate need of funds, was grounded, while Jet barely managed to stay afloat after a controversial sale of 24 per cent stake to UAE-based Etihad. Now, FDI under automatic route has belatedly allowed up to 49 per cent in aviation and through government approval for the rest. This reveals how government policies lag behind market developments and undermine struggling companies.

Even in defence, despite hiking FDI through automatic route to 49 per cent, FDI to the tune of just Rs.1.12 crore flowed in. The government appears to have now realised that big foreign players are unwilling to share cutting-edge technology with Indian counterparts. By doing away with the condition that foreign players must give access to “state-of-art” technology and allowing 100 per cent FDI through government approval, coupled with the incentives for buying defence equipment designed, developed and manufactured in India, the government has put its best foot forward. The 100 per cent FDI in defence is also an opportunity for the government to review its Buy Indian procurement which will comprise domestically designed equipment with 40 per cent indigenous components, or foreign-designed equipment with 60 per cent local components. It can be argued that with 100 per cent FDI there is no cause for importing foreign components. However, the government has already yielded on the domestic sourcing of components in single-brand retail, where it has offered a reprieve to Apple and other manufacturers who resisted the local sourcing norms.

But the 74 per cent FDI in pharma through automatic route in brownfield pharma companies and 100 per cent through government approval for greenfield projects could have implications on generic drug companies. A parliamentary standing committee had even suggested a blanket ban on FDI in brownfield pharma companies. The 100 per cent FDI in airports ties in neatly with the new civil aviation policy’s attempt to boost the construction of airports in Tier-B and C cities. But unless these smaller airports can demonstrate financial viability, it is unlikely that the FDI inflows will fructify. Ultimately, the FDI inflows will depend more on the attractiveness and price-competitiveness of Indian markets.