Modi govt announces FDI reforms in aviation, pharma, defence; opposition unimpressed

Government on Monday launched a second wave of FDI reforms allowing 100% inflows in civil aviation and food processing sectors while easing norms in defence and pharmaceuticals, steps apparently aimed at neutralising fallout of Raghuram Rajan's decision to exit RBI.

A significant change in local sourcing policy for single-brand retail trading could now enable US-based Apple Inc to open stores under Monday's decisions which also cover broadcasting carriage services, private security agencies and animal husbandry. The major reform measures were decided at a high-level meeting chaired by Prime Minister Narendra Modi, which was earlier said to have been planned for Tuesday. 

The Prime Minister's Office (PMO) said the decisions will make "India the most open economy in the world for FDI", but critics said it was a "panic" reaction to Rajan's decision on Saturday to exit RBI and return to academia after September 4. The stock markets also reacted positively to the news of FDI reforms even as they recovered from early morning plunge after talking-up by influential marketmen that helped counter Rexit (Rajan's exit) jitters.

Congress spokesman Jairam Ramesh described the decisions as a "panic reaction" which would not have come had Rajan not made the announcement. He also said the Congress does not believe that FDI is a magic wand. Briefing media, Commerce Minister Nirmala Sitharaman said the decisions would help in attracting more investments, creating jobs and making India the global manufacturing hub.

Asked whether the announcement was timed to counter the 'hangover' of Rajan, she said, "This work was going on for a couple of months. Can all this work be done in a day? It is proper to make the announcement when the work is complete." Economic Affairs Secretary Shaktikanta Das said the changes would do away with dual clearances of proposals and will boost manufacturing and generate more jobs.

"Now most of the sectors would be under automatic approval route, except a small negative list. With these changes, India is now the most open economy in the world for FDI," the PMO statement said. The first batch of FDI reforms were announced by the government in November 2015.

Changes in Civil Aviation Policy 

The most important announcement made today relates to civil aviation in which 100% FDI has now been allowed in airlines, except by foreign carriers. Norms for overseas investment have also been relaxed in brownfield airports.

Under the present policy, foreign investment up to 49% is allowed under automatic route in domestic airlines. It has now been decided to raise this limit to 100%, with FDI up to 49% under automatic route and beyond that through Government approval.

100% FDI in defence

In the defence sector, the policy has been tweaked to allow 100% FDI by doing away with the condition of access to "state of the art" technology. It has now been modified to "modern or for other reasons", a move that will widen the scope of investment by foreign players.

The new norms have also been made applicable to manufacturing of small arms and ammunitions covered under Arms Act 1959. Under the current policy, FDI up to 49% was allowed under automatic route and beyond that under the approval route.

Changes in pharmaceuticals sector

For the pharmaceuticals sector, the government relaxed the norms and permitted FDI up to 74% through automatic route in brownfield projects and approval route beyond that limit to promote the development of this sector.
The move assumes significance as FDI in the existing pharma companies has been a contentious issue as concerns have been raised over some M&As of Indian pharma companies by foreign giants.
Some analysts stated that such activities were impacting accessibility and growth of the generic industry in the country.

In case of private security agencies, FDI up to 49% is now permitted under automatic route and up to 74% through approval route. The current policy permits 49% FDI under government approval route in private security agencies.

The government has also permitted 100% FDI under automatic route in several wings of the broadcasting carriage services which include teleports, direct-to-home, cable networks, mobile TV and headend-in-the sky broadcasting service.

However, the statement said: "Infusion of fresh foreign investment beyond 49% in a company not seeking licence/permission from sectoral ministry, resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor, will require FIPB approval." In order to promote manufacturing of food items, the government decided to permit 100% FDI under approval route for trading, including through e-commerce in respect of such products manufactured or produced in India.

The government has decided to do away with the requirement of separate security clearance or RBI approval for setting up of branch or liaison offices by foreign companies dealing in defence, telecom, private security or information and broadcasting if the requisite approval of FIPB or the ministry or regulator concerned is in place. The government has also decided to do away with the 'controlled conditions' for FDI in these activities relating to animal husbandry.

As per the existing policy, FDI in animal husbandry (including breeding of dogs), pisciculture, aquaculture and apiculture is allowed 100% under automatic route under controlled conditions. Measures undertaken by the government have resulted in increased FDI inflows from USD 36.04 billion in 2013-14 to US 55.46 billion in 2015-16, the highest ever FDI inflow for a particular financial year, the statement said.

"However, it is felt that the country has potential to attract far more foreign investment which can be achieved by further liberalising and simplifying the FDI regime. India today has been rated as number one FDI destination by several international agencies," the statement added.

Nirmala Sitharaman's reaction

The changes in the FDI policy, it said, are aimed at liberalising and simplifying the norms with a view to promoting ease of doing business, encouraging greater capital flows and making India an attractive destination for foreign investors. Commerce and Industry Minister Nirmala Sitharaman said these initiatives are expected to increase FDI inflows which have been very encouraging over the last two years.

"Now there is a greater clarity in terms of the caps, in terms of the process of approval, in terms of making it easy so that the rigours of going through an investment proposal are all eased out," she told reporters here.
Explaining about the relaxation in the defence sector, she said the idea behind dropping the term "state of the art" was "essentially we are spending time in defining things and spending time in understanding what exactly is state of the art and what exactly is this cutting edge".

"So instead of keeping it verbose and instead of making too many things binding us down on what is it that you have to comply. By using this one word 'modern', we thought we are able to cover on bring in technology which was required and there is no other thing behind the logic," she added.

On single brand retail, the minister said the policy was relaxed but she is conscious that there is a need to protect small industries. "Local sourcing has the noble objective, we can't completely forget it...so we thought we should allow them to come and stabilise. But then not to forget that commitment," she said.

When asked after this relaxation, what would happen to Apple Inc's application, she said: "It will be considered if they apply". She further said: "We have done, we are doing, we will keep it doing as much as it takes to make India a manufacturing hub...we are on our toes".Reacting on the single brand issue, tax consulting firm PwC India said the policy already provides for the window of granting relaxations from sourcing norms for single brand retail trading of products made with 'state of the art' and 'cutting edge' technology.

"It seems proposed announcements seeks to provide more clarity on the framework for relaxation," it said in a statement. Consulting firm KPMG said easing out of conditionalities in the retail sector would have a positive impact on investment inflow.

"Liberalising of sourcing conditions may make entry for companies like Apple in SBRT activities easier," it said adding 100% FDI in food sector will also give opportunity to multinational companies like Walmart, Tesco to embrace this new policy into their existing presence in India.

Reaction from opposition party and RSS affiliates 

 FDI reforms were slammed by an RSS affiliate as "betrayal" of people's trust while opposition parties said "sweeping" changes in the policy in Defence posed "big threat" to national security with Congress demanding its withdrawal. The Congress also went on to say that the Foreign Direct Investment(FDI) reforms were a "panic reaction" with its spokesman Jairam Ramesh asserting it would not have come about had Raghuram Rajan not announced his decision on Saturday to exit RBI as Governor. The government, however, maintained the reforms initiative had nothing to do with Rajan's decision.

CPI(M) General Secretary Sitaram Yechury said the "dangerous part" is FDI in defence, noting there are very few countries where it is allowed in this sensitive sector. Opposing the major reforms, the Trinamool Congress said that in the name of 'Make in India' the Modi government is "breaking India". The Swadeshi Jagran Manch, the RSS affiliate which has been criticising some economic policies of the Modi government, said the FDI reforms is not aimed at job creation.

"It is aimed at snatching away jobs from Indian people. It will spell a death knell for local businessmen." "Opening sectors like retail, defence and pharma to FDI and by relaxing norms is 'betrayal' of people of the country.
In doing so, this government has not done good to the country in general and local businessmen in particular," SJM's national co-convener Ashwani Mahajan told PTI. In a strongly worded statement, senior Congress leader and former Defence Minister A K Antony said allowing 100 per cent FDI in defence sector means it is thrown mostly into the hands of Nato-American defence manufacturers.

Antony said "sweeping" changes in the FDI policy posed a "big threat" to national security and India's independent foreign policy. "Naturally it will affect India s independent foreign policy too. It will also threaten the national security. Moreover, it will have an adverse impact on the ongoing indigenous defence research activities in the country," he said. It is "very important" to note that all such changes happen immediately after Prime Minister Narendra Modi's recent visit to the US, he added.