Thursday, December 2, 2021

The New Foreign Direct Investment Policy To Boost Growth

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The Government of India has announced a new Foreign Direct Investment policy in various sectors with the objective to enhance economic growth and employment. FDI is a source of non-debt finance for enhancing investment. These amendments to the FDI Policy are meant to liberalize and simplify the FDI policy. This will provide further “ease of doing business” in the India.

India’s external sector has two important foreign investment components. One is Foreign Direct Investment. The other component is Foreign Portfolio Investment. The investment in FDI is comparatively stable than the foreign capital inflows to Portfolio investment. This is because the foreign portfolio investment can be volatile if the interest rate of West is higher. The major chunk of the foreign portfolio investment is “hot money” and it can respond to interest rate differentials and lead to “capital flight”. So the emphasis on “FDI policy regime” is a formidable move.

The renewed emphasis on Foreign Direct Investment is a good policy shift in foreign investment, as it can ensure stable and sustainable investment and in turn catalyse economic growth and has job creation potentials.

In the recent announcement, the Government permitted FDI up to 100% “on the automatic route” in most sectors/ activities include Defence, Broadcasting, Civil Aviation, Construction Development, Trading, Pharmaceuticals, Power Exchanges, Insurance, Asset reconstruction Companies, Pension and Other Financial Services. This FDI policy amendments are a follow up of the proposals announced in the Union Budget 2019-20 by the Finance Minister to make India a more attractive FDI destination.

As per the official estimates, the aggregate FDI into India from 2014-15 to 2018-19 has been US $ 286 billion as compared to US $ 189 billion in the period from 2009-10 to 2013-14. The available (provisional) estimates for 2018-19 showed that the FDI is US $ 64.37 billion is the highest ever FDI received for any financial year.

In the recent announcement, 100 % FDI under automatic route is allowed for coal mining activities. This includes FDI for associated processing infrastructure as well, subject to provisions of Coal Mines (Special Provisions) Act, 2015 and Amended Mines and Minerals (Development and Regulation) Act, 1957. The possibility of increased mining royalty revenue through these initiatives can increase the “fiscal space” under “non-tax revenue” category.

With the objective to strengthen “Make in India” initiatives, FDI is now permitted under automatic route in contract manufacturing sector in India. The Government also announced reforms to ease the local sourcing norms for FDI in Single Brand Retail Trading (SBRT). This will ensure a “Level Playing Field” for companies with higher exports. It also provides greater flexibility and ease of doing business for Single Brand Retail Trading entities.  The Indian Government has also permitted online sales prior to opening of brick and mortar stores.It brings policy in sync with current market practices. The government believes that the online sales will increase employment generation in logistics, digital payments, customer care, training and product skilling.

In case of digital media, Government provides for 49% FDI under approval route in Up-linking of ‘News Current Affairs’ TV Channels, as per the new announcement. The Government will permit 26% FDI under government route for uploading/ streaming of News and Current Affairs through Digital Media, on the lines of print media, as per the recent policy announcement.

The point to be borne in my mind is that these policy announcement by the Government is against the backdrop of adverse headwinds in the global trends in the FDI inflows. The UNCTAD’s World Investment Report 2019 estimates showed that the global foreign direct investment (FDI) flows has decreased by 13 per cent in 2018. In absolute terms, it has decreased from US $1.3 trillion in 2018 from US $1.5 trillion the previous year. The new FDI announcement is based on the positive belief that India will be able to attract FDI by liberalizing and simplifying the existing FDI policy regime.

Script: Dr. Lekha Chakraborty, Professor, NIPFP

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