What could be seen as big bang reform, the Union Cabinet has approved significant rationalisation of Foreign Direct Investment policy in 12 sectors which include Telecom and Defence.
This move is expected to stimulate FDI inflows in the contributing to growth of investment, incomes and employment. The Department of Industrial Policy and Promotions (DIPP) will issue required notification within a month.
In 2012-13, total FDI inflow dipped by 38 per cent to $22.42 billion. However, the first month of the current fiscal, April saw 25 per cent increase in FDI to $2.32 billion.
Most significant development in the new FDI regime is related with defence production. Now, more than 26 per cent FDI will be vetted by the Cabinet Committee on Security on case-to-case basis. Such proposals are likely to result in access to modern technology. Meanwhile, given the strategic and sensitive nature of the sector, the Defence Ministry is not in favour of FII investment in the sector.
Similarly, keeping security and sensitivity considerations in mind, it has been decided to allow FDI beyond 49 per cent through approval by the Government in sectors such as Telecom, Single Brand Retail and asset reconstruction companies.
Investment up to 49 per cent will be permitted through automatic route. Automatic route means an investor does not need prior approval from the Government and they just need to file an application with the Reserve Bank of India.
The Government feels that Indian ownership and control are essential in sectors such as PSU refinery, stock exchanges, commodity exchanges and power exchanges due to national security considerations. That is why limit in these sectors has been kept at 49 per cent. However, such investment will not require prior Government approval.
The entire exercise is based on the recommendations given by Arvind Mayaram Panel and meeting chaired by the Prime Minister on July 16. However, all his recommendations have not been implemented.
For example, due to opposition by the Civil Aviation Ministry, suggestion for raising FDI limit in domestic airlines to 74 per cent has not been accepted while, the Information and Broadcasting Ministry favours raising cap in newspaper and news channel only after receiving views from telecom and broadcast regulator TRAI and Press Council of India.