The foreign connection

To get a slowing economy on the growth track, the government has approved easing foreign direct investment norms to arrest the rupee’s slide, boost incomes, create jobs and fund cash-starved sectors. Gaurav Choudhury writes.
Hindustan Times | By Gaurav Choudhury, New Delhi
UPDATED ON JUL 23, 2013 10:58 PM IST

A government, desperate to arrest the economic slowdown and stem the rupee’s slide, has relaxed the investment caps for foreign investors in telecom, high-tech defence production and insurance. HT takes a closer look at what in it for you and the economy.

What major reform measures were announced by the government in the past week?

In an action-packed reforms initiative, the government last week raised foreign direct investment (FDI) caps in a range of sectors, including telecom, ‘state-of-the-art’ defence production and insurance and eased norms in many others aimed to spur investment and stem the rupee’s slide — vital to spin jobs and boost income in a slowing economy.

The FDI cap in the telecom sector has been raised to 100% from the present 74%. On defence production, the Cabinet Committee on Security (CCS) will approve proposals on a case-to-case basis beyond the existing 26%, which are likely to result in “access to modern state-of-the-art technology in the country”.

The decision to overhaul the FDI policy, broadly based on recommendations made by economic affairs secretary Arvind Mayaram-headed committee, were taken in a meeting chaired by Prime Minister Manmohan Singh with his senior cabinet colleagues last week.

What has the government proposed for the insurance sector?

The government has also decided to raise the FDI cap in the insurance sector to 49% through the automatic route, subject to legislative amendments by Parliament.
The government approved the politically contentious move to hike the FDI ceiling percentage from the current 26% in India’s rapidly-growing private insurance sector hobbled by lack of capital.

Why do insurers need money?

Insurers need funds to maintain healthy capital base, offer a wider bouquet of products and protect consumer interests against insolvency.

When can one expect the cap on FDI in insurance to be hiked?

The passage of the Insurance (Amendment) Bill that has proposed raising the FDI limit to 49% remains uncertain and has been pending in Parliament since 2008 for lack of political consensus.

The Left parties and former UPA ally Trinamool Congress, led by West Bengal chief minister Mamata Banerjee, are opposed to the Bill. The government plans to introduce an amended Bill in the monsoon session of Parliament next month.

What are the other measures that were announced as part of the FDI policy overhaul?

Besides raising caps in several sectors, the government has also eased norms allowing FDI to come in through the automatic route.

This will hasten actual fund flow as investors only will need to make appropriate disclosures to the Reserve Bank of India (RBI), instead of routing these through the Foreign Investment Promotion Board (FIPB) — the nodal agency empowered to vet FDI applications in India.

The government also raised the FDI limit on credit information companies to 74% through the automatic route against the existing 49% cap subject to approval by the FIPB.

Likewise, FDI in petroleum refineries, commodity exchanges, power exchanges and stock exchanges will be allowed through the automatic route with their caps retained at 49% for each of them.

What about FDI caps in other sectors?

The FDI cap on civil aviation has been retained at 49%. Besides civil aviation, no view was taken on relaxing FDI caps in airports, media, brownfield pharma and multi-brand retail. While some of these caps can be raised through executive orders, raising the FDI ceiling in insurance will require Parliament’s approval.

What are the targeted objectives of the policy change?

The fresh policy pronouncements are likely to soothe frayed nerves of investors who fear that the government is more likely to be focused on political risk management rather than reverse the slowdown in the economy, which until recently was an engine for global growth.

By when can one expect the benefits to become visible?

The intended effects of stemming the rupee’s slide and spurring income growth through higher FDI caps in a range of sectors and simpler entry norms in others may take some time to kick in.

Business leaders welcomed the FDI policy overhaul but cautioned that more needs to be done to turnaround India’s image as a global investment destination.

Analysts point out that quick decision-making, speedier implementation and a non-interfering administration are vital to reverse the slowdown in India’s economy, spin jobs and multiply income.

More importantly, India should be extra careful about sending out wrong signals to potential and existing investors. If the next investment wave continues to remain centred on Asia, a frontline emerging economy like India cannot afford to be inconsistent in the way it welcomes foreign capital.

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