The Union Cabinet recently decided to further liberalize foreign direct investment (FDI) rules in four sectors.
What are the key changes?
The government approved foreign investment in digital media up to stakes of 26%.
100% foreign direct investment (FDI) under the automatic route in coal mining and associated infrastructure has been approved.
This is to include those companies seeking to commercially sell the commodity.
To boost domestic manufacturing, 100% FDI in contract manufacturing under automatic route has been allowed.
On FDI in single-brand retail trade (SBRT), the Cabinet has expanded the definition of a mandatory 30% domestic sourcing norm.
[Currently, the FDI policy provides that 30% of the value of goods has to be procured from India if the SBRT entity has FDI of more than 51%
Under the changes, all procurement made from India by the SBRT entity for that single-brand shall be counted towards local sourcing, irrespective of whether the goods procured are sold in India or exported.]
It also allowed single-brand retailers to start online sales, waiving the previous condition of setting up a mandatory brick-and-mortar store.
What is the rationale?
The government is clearly concerned by the economic slowdown and persistently weak investment activity.
Also, there is a little slowing down of FDI worldwide.
The RBI too recently pointed out that net FDI flows had moderated to $6.8 billion over the first 2 months of the current fiscal year (2019-20) from $7.9 billion in April-May 2018.
Also, the government has set a goal of ensuring India becomes a $5 trillion economy within the next 5 years.
So, the overall consumptive capacity needs to be raised manifold to support demand growth.
Given these, the move comes as an effort to get economic growth back on track.
The measures are expected to make India a more attractive destination to overseas investors and boost investment in private sector.
It would provide a policy fillip to attract more foreign capital into sectors that are seen as having a multiplier effect particularly in terms of job creation.
What are the shortfalls?
A closer examination of the reforms raises several concerns about the ultimate attractiveness of these changes.
Coal mining - The changes to investment norms on coal appear to be a win-win for both the economy at large and the coal industry.
[This is keeping aside the environmental costs of focusing on one of the most polluting fossil fuels.]
This is based on the prospect of seeing an influx of both capital and modern technology into mining and processing.
Another factor is raising the domestic supply of the key raw material for power, steel and cement production thereby cutting costly and increasing imports.
However, for foreign mining companies to proceed, several related regulatory and market challenges will have to be addressed.
Large miners will need economies of scale and so require access to large contiguous fields with minimal bureaucratic constraints on operations.
Given these, how much additional investments may actually accrue is not clear.
Addressing these shortfalls is essential to make the latest FDI rule changes to be enough to draw a rush of investments.
