Concerns about India’s delayed growth recovery have prompted the Government to take steps to restore investors’ faith. The Union Cabinet reaffirmed its commitment to attract foreign direct investment by announcing FDI policy liberalisation. The big-ticket items include enhancement of the sectoral limits for telecom and defence, and easing conditions for multi-brand retail trading.

The 100 per cent FDI in telecom will finally allow foreign players to own and fund Indian companies without being restricted by the latter’s funding capability. This will also allow several Indian telecom companies to access much-needed overseas funds and not rely on expensive local debt. It will allow telecom companies to build infrastructure and networks, and meet rollout obligations.

Multi-brand retail has the potential to attract big bucks into the country. While the policy allowing foreign investment in this sector was announced almost a year ago, it did not take off due to regulatory hurdles. Following talks between the Government and the stakeholders, the Cabinet amended the policy by clarifying certain provisions to address stakeholders’ concerns. The clarification that mandatory investment in back-end infrastructure would be limited to 50 per cent of minimum FDI inflow allows retailers to source from small vendors that may have grown organically beyond their plant and machinery investment limit. This, and allowing States that have approved FDI to nominate cities with a population less than 10 million are business-friendly announcements. Hopefully, this would attract the much-needed foreign exchange to develop back-end infrastructure which, in turn, would help reduce farm-to-fork wastage and prices.

The Defence sector too has potential to attract foreign exchange inflows. The Cabinet has opened a window whereby FDI beyond 26 per cent will be possible and considered by the Cabinet Committee on Security, thereby providing access to modern defence technology. While this certainly is a step forward, there is no clarity on what will be considered “modern” technology.

The Cabinet also approved enhancing FDI caps in sectors such as asset reconstruction, credit information, and tea. It also removed the need for Government approval in certain sectors where foreign investors were acquiring a minority stake — such as petroleum and natural gas, power, commodity and stock exchanges, courier and single-brand retail — thereby helping Indian companies access foreign capital.

Regarding single brands, foreign retailers may not warm up to the idea of taking 49 per cent stake in an Indian joint venture, as they are concerned about intellectual property and branding.

So, will these changes bring in the desired FDI? Has the Government done enough on the FDI liberalisation front? Considering the upcoming elections, will investors prefer to hold on to their money and base their decision on the election outcome?

Nevertheless, the reforms were imminent, given the current economic situation. The Government has put the country on the right track to regain investor confidence. Speaking purely from a regulatory perspective, it’s a job well done.

Goldie Dhama is Executive Director, and Sahil Gupta is Senior Manager, Tax and Regulatory Services, PwC India

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