The latest policy approval from the Cabinet Committee on Economic Affairs came as the much-awaited impetus to shore up the flagging economy. It approved changes to the FDI framework on August 28 in keeping with assurances made in the recent Budget speech.
This could well be one more step towards India becoming a $5-trillion economy.
The changes across four sectors include foreign investment in digital media up to 26 percent, 100 percent foreign direct investment (FDI) for coal mining and contract manufacturing and easing of sourcing norms for single-brand retailers.
There has been a lot of push towards further liberalising norms in these sectors in the wake of global FDI inflows facing headwinds over the past few years. Now, the government has opened the door acknowledging the value of the single largest source of non-debt finance that fuels the economy.
Let’s take a look at the nuts and bolts of what this means to foreign investors and the economy as a whole, sector-wise.
Single Brand Retail Trading (SBRT)
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- Strict sourcing norms have been whittled down and SBRT entities having more than 51 percent FDI can now manage their 30 percent sourcing requirement irrespective of whether the sourcing is done for local or global operations.
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- Sourcing of goods from India for global operations can be done both directly or indirectly through a legally tenable agreement with unrelated third parties. This was not possible earlier.
- The requirement of SBRT entities which were previously not permitted to initiate trading via online stores without opening brick-and-mortar ones has also been done away with.
- Providing clarity and easing sourcing norms are expected to bring in fence sitters who have been waiting on the sidelines. However, not addressing multi-brand retail is a big miss and foreign retailers selling a wide range of product categories would have to continue sitting on the fence. On the positive side, given that the government has already tested waters in retail, the relaxed norms are expected to further enhance the ‘Make in India’ brand globally and enhance domestic production.
Considering the complex nature and dynamics of the Indian market, it is unlikely that most large retailers would sail by themselves and we are likely to see partnerships foster, dispelling any concerns for large Indian groups.
This also augurs well for foreign retail entities which were earlier sceptical about entering the Indian market due to high investment of setting up physical stores. They can now test waters by starting to trade through online stores without opening such stores at least for two years.
Coal Mining
As of March 31, 2018, India had 319.04 billion metric tonnes (351.68 billion short tonnes) of coal reserves. Despite burgeoning demand, Coal India, which has the monopoly to exploit resources, has under delivered and India has had to import coal despite having the fifth-largest reserves in the world.
The nod for 100 percent FDI via automatic route is a welcome step in the right direction for the commercial exploitation of coal and other ancillary operations. This liberalisation in the coal sector paves the way for bringing in newer technologies in coal extraction and ending the dominance of Coal India.
Impact
There are several challenges that remain despite the opening up of FDI in coal. Among others, the three-headed hydra namely environment clearances, mining leases and land acquisition have to be dealt with if foreign investors are to be interested in coal mining, which is a highly capital intensive industry.
The process of auction of mining leases may also have to be tweaked into two stages, namely price discovery and allotment based on a first come basis through a thorough process of diligence. A transparent process in environment clearances, along with set procedures for land acquisitions, will be some of the minimum guarantees that a foreign investor would look at while exploring coal.
Contract Manufacturing
Though existing norms permit 100 percent FDI in the manufacturing sector under the automatic route, there had been no clarity on contract manufacturing. This has now been clarified and 100 percent FDI under automatic route has now been allowed in contract manufacturing by any entity for investment and manufacturing through a contract on both Principal to Principal and Principal to Agent basis.
Impact
Contract manufacturing is expected to provide a major fillip to the Indian economy and create more employment opportunities. Sectors including electronics and pharma, which avail of tools of contract manufacturing, will be keen to exploit the Indian market. Given the backdrop of the US-China trade war, this move can perhaps work to India’s benefit as American companies facing the heat from China look to greener pastures.
Digital Media
The existing policy had been silent on FDI in digital media. Now, 26 percent FDI under the government route has been permitted for entities undertaking uploading or streaming of news and current affairs through digital media.
Impact
The move may perhaps be a double-edged sword and further clarity is required on what constitutes digital media since this was largely looked at as a sub-set of broadcasting entities where the previous policy provided 49 percent FDI and has enabled some broadcasting houses with 49 percent FDI to also have a digital arm, which as specified could undertake “uploading/streaming of news and current affairs through digital media”.
However, this change can land a number of media entities in a spot of bother and is perhaps a regressive move, considering 49 percent FDI in television. Treatment of foreign news sites will also have to be clarified since it is virtually not possible to ban sites which are non-compliant.
Despite some misses, the changes in FDI policy are in the right direction and should provide the necessary shot in the arm for the Indian economy and drive up consumption and investments, further augmenting the perception of Indian growth story globally.
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