India bites reforms apple, eases FDI norms in defence, aviation, single brand retail

The government has opened the floodgates to foreign direct investment (FDI), making India the most open economy in the world. Barring a few, most sectors have now been opened up for FDI through the automatic approval route.

The roll-out of the second wave of FDI reforms saw the government allow 100% inflows into defence, civil aviation, food processing, broadcasting and pharmaceuticals.

Prime Minister Narendra Modi said that with the liberalisation of the FDI regime, there have been more inflows to contribute to investment, income and employment growth.

Relaxing the conditions for single-brand retail trading, local sourcing norms were waived up to three years and another five years for undertaking single-brand retail trade of products having "state-of-the-art" and "cutting- edge" technology.

Now, entities like Apple could open its own outlets in India. Under the new rules, local sourcing norms have been relaxed. Now, they will get up to three years of grace period. However, cutting-edge product-sellers will get a relaxed sourcing regime for another five years.

They will have to take a call if they want to take advantage of the waiver on local sourcing norms. On May 25, the government had rejected Apple's application for a waiver. Chinese mobile companies LeEco and Xiaomi, which had sought a waiver of the sourcing norms, will also have to apply again. Single-brand retailers like furniture giant IKEA also stand to benefit.

The PMO said that India today has been rated as the No 1 FDI investment destination by several international agencies. The country recorded the highest FDI inflow of $55.46 billion in 2015-16 against $36.04 billion during 2013-14 (UPA rule), it said.

The last major changes in FDI norms came in November 2015. Commerce minister Nirmala Sitharaman said that the decisions would help attract more investments, create jobs and make India the global manufacturing hub.

Former defence minister AK Antony said: "It is immediately after the PM's visit to the US... The move poses a big threat to national security and India's independent foreign policy. Allowing 100% FDI in defence means India's defence sector is thrown mostly into the hands of Nato-American defence manufacturers. It will have an adverse impact on the indigenous defence research activities in the country."

RSS affiliate Swadeshi Jagran Manch (SJM), too, slammed the government. "FDI in retail is no less than anti-national. It is like kicking our own people in the stomach. Didn't expect this government to do this. It will make animal husbandry more difficult. We will protest," it said in a statement.

Anand Sharma, former commerce minister, said the FDI in pharmaceuticals was already permitted, while for brownfield companies, a government approval was necessary to avoid takeovers. "Now, they have allowed 74% FDI in brownfield projects. It is clearly pressure from the US pharma lobby," said Sharma.

Economist Dr D K Pant said FDI inflows will take time. Amber Dubey, Partner at KPMG in India, is excited about the opening up of defence sector. "This decision will now bring in real investments, provided the defence ministry also speeds up procurement process and issues big-ticket orders. Avoidable controversies on 'ownership and control' issue is now over. Defence OEMs can now focus on actual research, design and manufacturing than wasting time on legal and regulatory issues," he said.

Kalpesh Maroo, Partner, BMR & Associates LLP, said the most important announcement is permitting FDI in entities engaged in retailing food products produced and manufactured in India.

The government has also decided to allow 100% FDI under the government approval route for trading, including through e-commerce, for food products manufactured or produced in India. The government move was seen as an invitation to global retailing majors like Walmart and Tesco.

"Consumers, producers and farmers will benefit through better technology, latest methods, modernisation and investments in the sector. The wastage, inefficiency, lack of transparency and prevalence of middlemen will reduce," K Ganesh, serial entrepreneur and co-promoter of Bigbasket, one of country's leading grocery e-retailer, told dna.

Easing restrictions on some of the non-food items, at least those which go along with food items, is something which the government can consider, believes Ganesh.
In civil aviation, the government has allowed 100% FDI, up from 49% under the automatic route. However, more than 49% investment would need government approval. The government has also allowed 100% FDI in brownfield, or existing, airport projects under the automatic route. The announcement is likely to push up some airline stocks.

Peeyush Naidu, Partner, Deloitte, sounded more cautious when he said: "We are unlikely to see investors suddenly rushing to invest in airlines just because the 49% cap has been removed. Also, remember that investment by foreign airlines is still capped at 49%. So, it remains to be seen whether other investors such as PEs and the likes would have the risk appetite to make such investments."

The main beneficiaries will be Qatar Airways and Dubai's Emirates. At present, India has 10 airlines, including scheduled and local airlines.

In defence, the government has increased 100% FDI from the present 49%, with government approval on a case-to-case basis, wherever it is likely to result in access to state-of-the-art technology.

The FDI limit for defence sector has been made applicable to manufacturing of small arms and ammunitions covered under Arms Act, 1959. Around 60% of India's defence needs depend on imports.

In the pharmaceutical sector, up to 74% FDI in brownfield projects has been approved under the automatic route. Beyond this limit, government approval would be needed.

The pharmaceutical sector already had 100% FDI in greenfield investments (investments in new plants), through the automatic route.

It had 100% FDI in brownfield -- investments via mergers and acquisitions -- with government approval. Today's announcement changes the rules for brownfield investments, opening up industries to 74% FDI through the automatic route.

Shobha Mishra Ghosh, senior director, Ficci, told dna that, despite this, there had been almost no greenfield investments and all FDI was through brownfield.

In the media segment, the government allowed 100% FDI in Teleports (setting up of up-linking HUBs/Teleports), Direct-to-Home cable networks (Multi-System Operators) operating at national or state or district level and upgradation of networks towards digitisation and addressability, Mobile TV Headend-in-the Sky Broadcasting Service.

The government also allowed FDI up to 49% under the automatic route in private security agencies against the approval route earlier. Ownership beyond 49% and of up to 74% would need government approval.