Narendra Modi times FDI bonanza well to negate Raghuram Rajan shocker

No one could beat Prime Minister, Narendra Modi when it comes to timing; be it his government’s major announcements or showcasing the administrative achievements in the backdrop of spectacular shows. Many of his big-ticket announcements in the past have come just before his foreign trips.

The Monday announcement of further liberalisation in Foreign Direct Investment (FDI), as reported by CNBC-TV 18rules in a host of sectors including civil aviation and pharmaceuticals too has been timed well—this time to allay investors' sentiment following the farewell talk of Reserve Bank of India (RBI) governor Raghuram Rajan on Saturday.

 Narendra Modi times FDI bonanza well to negate Raghuram Rajan shocker


But, beyond the timing factor, the FDI announcement also indicates that there is a continuing momentum in the government and a sense of urgency is building up as it enters the third year of its term to push the reforms-juggernaut ahead.

As Firstpost noted in a recent article, the Modi-administration, which faced reforms blocks in the first two years of its rule, is showing signs that it has broken the jinx.

It is slowly setting the stage ready for growth with the passage of a host of structural reforms including bankruptcy law, Aadhaar Bill, subsidy reforms, besides showcasing a new national civil aviation policy and efforts to build up entrepreneurship through Start Up India and Make in India initiatives.

Monday’s announcement on FDI reforms, the second such in a period of last one year, is broadly an incremental reform step. It does send a signal to the foreign investors that the reform momentum is alive within the government. In aviation, the new rules permit 100 percent FDI under automatic route in scheduled Air Transport Service/ Domestic Scheduled Passenger Airline and regional Air Transport Service.

In this, FDI up to 49 percent is permitted under automatic route and FDI beyond 49 percent through government approval. In pharma, up to 74 percent FDI will be permitted under automatic route in brownfield projects, while the government approval route beyond 74 percent will continue.

Though private investment cycle is yet to resume in the desired manner to offer the required growth impetus to the economy, India has indeed seen an increase in inward FDIs in the recent years. The country received 42% more FDI across sectors between June, 2014 and March, 2016, according to union minister Nirmala Sitharaman. Total FDI inflows, which stood at $30.9 billion in 2014-15, rose to $40 billion in 2015-16.

Over the weekend, when Rajan announced his surprise decision not to continue as RBI governor ending September first week, questions were raised on the Modi-government on why it remained largely silent to support the RBI governor for a second term, who had a commendable stint at the RBI when he initiated critical reforms process in the banking sector. That question remains unanswered and strengthens theories that there is a political design to it.

But, as mentioned earlier, the BJP strategists have cleverly timed the FDI to tell the world that it isn’t perturbed with the Rajan factor and life is as usual in the North block and PMO.

While the incremental reforms are progressing, as an earlier Firstpost article said, it is time for the Modi-government to give a final push to the big ticket reforms, mainly the GST. The Modi-government is claiming that it now has the support of majority parties, including regional ones, to push the bill in Rajya Sabha, where the Bill is stuck for an year now. But, one has to wait and watch if BJP manages to get the political calculations correct and win the magic number by seeking support from all over, when the amendment is finally moved in Rajya Sabha. Passing GST this year is critical to meet the April 2017 deadline (already delayed by one year).

Also, the actual GST roll out would take much more time to happen even after Parliament clears the amendment since it has to go through state assemblies and processes. There is a lot of paper work involved for states to put in place the systems for the final implementation of the unified tax regime. Winning the GST puzzle would credit Modi with the largest tax reform the country has seen in a decade and silence his critics on the issue of reform progress.

As the next step, the government should also chalk out a roadmap for the privatisation of state-run entities to monetise those assets and wastage of public funds. The NITI Aayog’s recent recommendation for disinvestment in companies, including Air India and immediately winding up 26 state-run firms and leasing out several loss-making hotels, is a good point to start with. As the PJ Nayak committee recommended, the government should also look at the phased privatisation of public sector banks, many of them which are white elephants to the state exchequer.

While incremental reform steps will indeed come handy for the government to convince the investor community that the government is determined to progress on the reform path, there isn’t much time to pull off large ticket items such as GST. The signals so far indicate that the Modi-government has a plan to crack the GST puzzle. As for the FDI bonanza, the BJP’s strategists deserve credit for timing it well to absorb the Raghuram Rajan shocker.

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Updated Date: Jun 20, 2016 20:09:00 IST