Indian prime minister relaxed FDI restrictions on aviation, retail and construction sectors
Analysts say Modi's foreign investment reforms don't go far enough
The triad of Indian foreign investment reforms announced by prime minister Narendra Modi’s government on Wednesday came in the face of mounting concerns over the country's economic growth. Yet even these reforms are viewed as merely chiseling away at India's protectionist structures, rather than dismantling them altogether.
Mr Modi’s cabinet relaxed foreign investment rules in the aviation, retail and construction sectors on Wednesday, ahead of the prime minister’s trip to the World Economic Forum at Davos later this month.
Last week, the government released estimates that India’s gross domestic product will grow by 6.5 per cent through the 2017 to 2018 financial year, the lowest increase in four years.
The reform announcement is a signal to international investors ahead of Mr Modi's appearance at Davos, “an announcement to say: ‘Look, I’m taking steps, I’m not a nationalist,’” said John Samuel Raja, the founder of How India Lives, a New Delhi-based firm that analyses economic and demographic data.
India received US$60.1 billion in foreign direct investment (FDI) in 2016 to 2017, according to government statistics. But “it has been felt that the country has the potential to attract far more foreign investment, which can be achieved by further liberalising and simplifying the FDI regime,” a government statement said on Wednesday.
Foreign companies will now be permitted to automatically invest in and own 100 per cent of their Indian operations in single-brand retail stores such as Ikea or H&M, which stock their own products. Previously, companies were only allowed to automatically own 49 per cent of these operations. They required special government approval to own the full 100 percent, a painstaking and slow process.
Foreign investors will now also be allowed to buy up to 49 per cent of Air India, the state-owned airline. This limit has already been in place for shares of other private Indian airlines.
Additionally, investors can own 100 per cent of construction development projects: residential townships, hotels, urban infrastructure, and office complexes. The real estate beneath these projects, however, remains off limits to foreign investors.
The most significant of these reforms, Mr Raja said, was the one involving Air India. “Right now, Air India’s debt of 450bn rupees ($7bn) is hanging around the government’s neck,” he said. Selling a part of the airline will, Mr Raja pointed out, relieve the government’s fiscal strain.
The relaxation of retail rules comes as a reversal of sorts for Mr Modi and his Bharatiya Janata Party (BJP).
During the tenure of the previous, Congress-led government, the BJP, sitting in opposition, stalled parliamentary proceedings for days on end, maintaining that opening up the sector to foreign investors would wipe out small local retailers.
In 2011, Nitin Gadkari, the then president of the BJP, argued that the Indian states ruled by his party should not be forced to follow the Congress government’s proposed liberalisation of the retail sector. Mr Gadkari’s press release was issued two months before the government permitted foreign investors to seek special approval to own 100 per cent of their single-brand retail operations in the country.
“Congress is giving nation to foreigners,” Mr Modi himself tweeted in December 2012, just after the government at the time permitted foreign multi-brand retail firms like Walmart and Tesco to own 51 per cent of their Indian operations.
The Modi government’s reversal of the BJP's stance on Wednesday was, in a sense, just a part of politics, said Saloni Nangia, the president of Technopak Advisors, a retail consultancy.
“I think everyone understands that there’s some posturing here, and that whichever party is in the opposition has to just oppose what the government suggests,” Ms Nangia said. “And there’s some posturing that by opposing these measures to open up the retail sector, you’re protecting small businessmen in India.”
The reality, Ms Nangia said, is that India’s pace of consumption is growing so quickly that it needs retailers of every sort: modern and traditional, online and offline, foreign and home-grown. “Opening up retail won’t have any negative impact at all,” she said.
Ms Nangia was, in fact, disappointed that the Modi government had only relaxed its rules for single-brand retail. “All that has changed is that companies can now automatically own 100 per cent, whereas earlier they needed government approval for that,” she said.
Other strict rules, such as the requirement to source 30 per cent of products from within India, had not been done away with, she pointed out. “As a result, you won’t see Apple setting up here, for instance, because how could Apple source 30 per cent of its iPhones from India?”
The announcement, Ms Nangia said, was “a good step, but nothing dramatic. And it certainly does nothing for multi-brand retail companies".
But Mr Raja believed the rules for multi-brand companies would vanish soon as well. “This is how it happens in India,” he said. “They take away the regulations one by one, slowly. It’s only a matter of time.”