With FIPB gone, investments will hinge on inter-ministerial coordination

The dismantling of the Foreign Investment Promotion Board (FIPB), which served as the gatekeeper for foreign direct investment (FDI) into the country for the past 25 years, is more symbolic than substantive as over 90 per cent of inflow into the country in recent years has been through the automatic route.

As symbols go, it might be an important one as it attempts to declare to foreign investors that they need not see India as a country of red tape. But for that to happen, the alternative mechanism for clearance of proposals in the 11 sectors that still need government approval has to be without glitches.

“Critical sectors such as telecom, broadcast, civil aviation, defence, retail and private sector banking continue to need government approval. The important question is whether the line Ministries/Departments dealing with the sectors will get a free hand in dealing with the proposals and be in a position to give independent decisions,” a member of one of the leading industry associations told BusinessLine .

The relative easing of clearances would be key to a continuous increase in FDI which touched a high of over $60 billion in 2016-17, he added.

Finance Minister Arun Jaitley, in a media briefing last week, said a notification would be issued soon giving details about the Ministries/Departments that would be responsible for FDI clearances in the 11 sectors which need approval.

He also said that in case of further approvals from other Ministries, such as Home Affairs for proposals requiring security clearance, the relevant Ministry would coordinate and get the clearances.

But therein lies the hitch. How smoothly will the required inter-ministerial consultations on specific projects happen under the new dispensation remains to be seen.

“…it is hoped that DIPP comes out with clear guidelines and operating procedures defining the parameters that should be considered for clearance of proposals. This is required to ensure that there is alignment in the approach of different ministries,” points out Radhika Jain, Director, Grant Thornton Advisory.

To understand the role played by the FIPB so far in facilitating investments, one has to look at its history. Its importance cannot be overstated in the initial years of its existence in the early 1990s when the country had just opened its doors to FDI and many in the government were jittery about how things would work out.

Not surprisingly, the FIPB was initially constituted under the Prime Minister’s Office (PMO) so that the top office had total control over what was happening in the area. There was a three-layered approval process for recommendations of the FIPB.

In 1996, when the country was more at ease with the idea of liberalisation, FIPB was transferred to the DIPP. The Industry Minister was given the power to approve FDI proposals up to ₹600 crore and ones with higher levels of investments were sent to the CCFI (Cabinet Committee on Foreign Investment) for decision. The CCFI was also given the power to consider proposals that were rejected by the Industry Minister.

In 2003, the government decided to give a further push to FDI and constitute a separate secretariat under the Department of Economic Affairs. The charge of FIPB shifted from the DIPP to the DEA and it comprised a four-member core group of secretaries — DEA (chair), DIPP, Commerce and Ministry of External Affairs. Later the Secretary of Ministry of Overseas Indians was also included.

“Dismantling of FIPB presupposes good coordination between individual ministries but we have seen in the past that inter-ministerial issues don’t work out very well.

“FIPB had representatives from different ministries and a different kind of dynamics work in such groups. Whether individual Ministries can handle clearances from other Ministries such as Home Affairs or Environment remains to be seen,” points out Biswajit Dhar, Professor, Jawaharlal Nehru University.

The relevant notification specifying how clearances are to be obtained by the 11 sectors not under the automatic approval route should ideally put to rest all doubts and speculations. What is however known is that for FIPB proposals larger than ₹5,000 crore, the approval of the Cabinet would continue to be necessary.

To ensure timeliness of clearances of FDI proposals, there should ideally be timelines given to individual Ministries/Departments for clearance. In case they get stuck during inter-ministerial discussions it may be useful to have a mechanism in place for its resolution.