Why easing of FDI caps by Narendra Modi govt is largely cosmetic, changes little on the ground

New Delhi: There have been loud cheers for liberalisation in foreign direct investment (FDI) norms by the government but the cheerleaders have perhaps failed to see that these changes are largely cosmetic and at best, enabling. Of course, any easing of FDI norms is welcome and it cannot be denied that under the Modi government, FDI inflows have jumped substantially.

But having said that, the changes announced on Wednesday alter little on the ground. The government has announced up to 49 percent FDI in Air India and also opened up single brand retail to 100 percent FDI through the automatic route.

In Air India’s case, this move just brings the airline on par with the FDI cap for all other private airlines where up to 49 percent equity investment by foreign airlines was already permitted. As for single brand retail, the 100 percent FDI permission has merely been put on the automatic route – it was already allowed but through specific government approval on a case to case basis after the 49 percent cap. The bigger bugbear of foreign retailers – mandatory local sourcing norms – has merely been somewhat diluted, it remains a roadblock. And FDI caps on multi brand retail stay in place.

The Opposition is already roasting the Modi government for its alleged ‘U turn’ on FDI easing in retail trade, saying the Prime Minister Narendra Modi had opposed the same vociferously when the UPA was in power. This, when multi-brand retail trade and FDI limits in it have not even been touched. So is the cosmetic tweaking of FDI limits in high-profile sectors of aviation and retail trade a mere flash before the PM and his large entourage head to Davos for the World Economic Forum (WEF) meeting?

U.S. dollars. Reuters.

U.S. dollars. Reuters.

Let us look at Air India’s case first. By allowing foreign airlines to also participate in the disinvestment process, the government has merely lifted a small irritant – this single decision will likely not propel the disinvestment process forward at greater speed or with better efficiency. In the first place, keeping Air India out of the FDI ambit was a bit foolish – why have a policy for just one section of the industry and keep select companies (even if government owned) out of its ambit?

Besides, there is an indication that easing FDI limits now signals the government’s resolve to go ahead with the proposed disinvestment amid a lukewarm response from potential Indian bidders. Remember, Air India’s parent – the Tatas – may not have placed a bid at all if partner Singapore Airlines wasn’t allowed in. With the latest move, the Tata-Singapore Airlines combine, Jet Airways (which has a 24 percent partner in Etihad Airways and is looking for more foreign airline equity) and well-funded foreign airlines become potential bidders.

Till now, only IndiGo had evinced interest in the disinvestment process of Air India among airlines (others have been merely hinting at their interest without any formal proposal) and this too was restricted to international operations of Air India. All other potential bidders seem more interested in ground handling or other select businesses of Air India – not the airline operation.

But as we said earlier, allowing foreign airlines to partner Indian entities in bidding for Air India is just one step in easing the disinvestment process. The deal maker would be clarity on several other critical issues – how much debt is the government willing to take off Air India’s books, how much equity it is willing to offload and whether it wants to retain control in any fashion even after disinvestment. While global aviation consultancy CAPA has said that lifting the cap on foreign airline participation in the Air India disinvestment process will likely bring 4-6 potential bidders for the stake sale, it is final contours of the sale which will determine buyer interest.

On single brand retail, again the government has merely saved the foreign retailers mountains of paperwork they have had to do till now to get in, in case they wanted to set up shop with full control in India. Till now, 49 percent FDI was allowed under the automatic route in single brand retail but for anything beyond, government approval was needed. The local sourcing norms have been eased, but remain. Now, an single brand retail entity can set off its incremental sourcing of goods from India for global operations during initial 5 years, beginning 1st April of the year of the opening of first store against the mandatory sourcing requirement of 30 percent of purchases from India.

“For this purpose, incremental sourcing will mean the increase in terms of value of such global sourcing from India for that single brand (in rupee terms) in a particular financial year over the preceding financial year, by the non-resident entities undertaking single brand retail trading entity, either directly or through their group companies. After completion of this 5 year period, the single brand retail entity shall be required to meet the 30 percent sourcing norms directly towards its India’s operation, on an annual basis,” said an official statement.

Does putting 100 percent FDI on automatic route in single brand retail open up floodgates for global retailers desperate to come to the Indian market?

This piece in Business Standard says Apple may still not be enthused to set up branded stores in India though retailers like Ikea and H&M will benefit from easier sourcing norms. It also says that more than 200 fashion and apparel brands are lined up to enter India, including international labels such as Avva, Colin’s, Damat, Tudba Deri and Dufy. Local traders are, obviously, opposed to the easing of norms with the Confederation of Indian Traders ( CAIT) pointing out “love of this government” towards multinational companies and speaking of large scale job losses as a result of the FDI norms’ easing.


Updated Date: Jan 11, 2018 12:25 PM

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