India

Welcome decision to liberalise FDI

Jan 11, 2018
It is welcome that the government has eased foreign investment norms further, although these are incremental, rather than path-breaking, in nature. Liberalising foreign direct investment in Air India will probably make sure that the company will actually get privatised, with a majority stake held by an Indian entity that enjoys the trust of foreign backers now in a position to bid for the company complete with its huge debt burden. Allowing foreign direct investment (FDI) in single brand retail up to 100% under the automatic route, rather than under the government approval route as till now, is no big deal; but easing the sourcing norm is significant. Now, the 30% of local sales that has to be sourced from India can be sourced for global operations, and must be achieved over five years.
 
Some other relaxation of FDI norms are unlikely to make it to the headlines, but improve ease of doing business, such as dispensing with government approval for issue of shares against non-cash considerations such as pre-incorporation expenses and import of machinery when the investment is in sectors marked for automatic inflow. The decision to dispense with government approval for investment into regulated financial firms that will invest in other companies should make it easier for private equity and venture funds to increase capital deployment to India. This matters, when distressed assets being auctioned under the Insolvency and Bankruptcy Code resolution of bad loans are going cheap for want of adequate numbers of buyers. Having liberalised FDI in single brand retail, the government should now make bold and open up multi-brand retail as well. This is the reform that would level the field with e-commerce and pave the way for the maximum increase in job creation.
 
An organised retail chain across the country relieves small producers of the need to build their own distribution network, and boost investment in them. However, if there are not enough number of such organised chains to compete amongst themselves, such chains would squeeze direct producers badly.
 
The Economic Times, January 11, 2018

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