Union Cabinet has approved the ‘phasing out’ of Foreign Investment Promotion Board (FIPB).
What is FIPB?
The FIPB was set up in the early 1990s as an inter-ministerial mechanism to vet investment proposals from abroad.
Finance Minister promised in his 2017 Budget speech to abolish the FIPB.
The Department of Industrial Policy and Promotion under the Commerce Ministry is now expected to formulate a standard operating procedure to process FDI applications in 11 sectors that are still not in the automatic FDI approval list.
The department would have to be consulted by line ministries, which have been empowered to take ‘independent’ decisions on investments proposed in their domains.
The government hopes that as a result red-tapism will shrink, ease of doing business will improve and investors will find India more attractive.
What are the shortcomings?
The decision is more of a symbolic gesture.
Over 90% of investment flowing in already does not require an FIPB nod as it comes in through the automatic route.
Even where FDI limits have been raised significantly, there are rules attached that officers need to interpret for each case.
FIPB may have delayed clearances at times. Yet, it is not the FIPB but the complicated rules that have been responsible for a less enthusiastic response from foreign investors in some sectors.
e.g For instance, global insurers can hold up to 49% ownership in Indian ventures but only if Indians retain management and control over these entities. This rule has inhibited deal-making.
Despite allowing 100% FDI in food retail, rules prohibit foreign players from using a small fraction of their shelf space for non-food items.
This, in a sector that can create millions of jobs and boost farm incomes.
Archaic land acquisition and labour laws also continue to make it difficult for large factories to come up.
The efficacy of this move will be determined by the ability of individual ministries to exercise ‘discretionary’ powers without fear, favour or the cover provided by a collective decision-making body.
Bureaucrats are likely to remain cautious till the government carries out changes it has promised to the anti-corruption law to protect them from the wrath of auditors and investigative agencies for bona fide decisions taken in the line of duty.
