Economic Highlights

New Delhi, 25 June, 2016

New Open FDI Economy

INDIA WORLD MANUFACTURING HUB

By Shivaji Sarkar

Prime Minister Modi has virtually broken from the past and ushered in a new economy. The NDA Government has allowed 100 per cent FDI in defence, civil aviation, greenfield pharmaceutical projects, broadcasting carriage services – cable TV, DTH, food product e-commerce and relaxed sourcing norms for up to five years for single-brand retail trading.

Notably, now IKEA and Apple can have a sigh of relief as they can set up stores across the country. Foreign pharmaceutical companies can now also set up their units in the country. The new rules will help foreign defence firms, food marketing companies to enter India and opens up aviation sector with increased competition. It has also brought in ‘labour reforms” through the textile package route.

In fact, the Prime Minister's Office (PMO) underscored the decisions would make “India the most open economy in the world for FDI”. Perhaps, this is correct as the country also prepares for mega telecom spectrum sale.

Undeniably, the decision to allow 100 per cent FDI in defence marks a major push to defence manufacturing under the 'Make in India' initiative. Moreover, the Government has dropped the requirement for ‘state of the art’ technology requirement to apply for FDI relaxation above 49 per cent.

Arguably, this does not mean automatic approval for defence deals as those above 49 per cent still need Government approval but now contracts not involving ‘state of the art’ technology can also opt for the route, under the garb of “modern technology.”

While the Government has been aggressively pushing global defence companies to set up manufacturing in India, one of the major limitations cited has been the 49 per cent FDI limit which meant the Indian partner would hold the controlling stake in the joint venture.

Remember, in the past the Government had stated that relaxation above 49 per cent could be given on a case by case basis through the Foreign Investment Promotion Board (FIPB) for state-of-the-art technology and depending on the extent of technology transfer.

However, major Indian corporates had opposed relaxation beyond 49 per cent arguing that Indian companies should be in control so as to build domestic expertise. Indeed, the new decision virtually puts Indian companies at par with the foreign manufacturers. Whereby, there is apprehension that since foreign firms have technologies, they would have an upper hand.

Besides, the new policy might force Indian companies to take a re-look at their plans as it reduces the dependence of original equipment manufacturers (OEMs) on domestic manufacturers. As this might change the business dynamics. But it is possibly a clever ploy so that no company gets undue advantage in business, security and political brinkmanship.

But, corporates largely sees this as a win-win situation for the country’s defence forces, local industries and international OEMs. According to companies like Tata Motors this move would also enhance the overall Research and Development to develop and deploy country-specific solutions.

In the aviation sector, undoubtedly, by opening up the skies, doing away with the five-year operational requirement to fly abroad will help some of the new airlines set up as joint ventures. In the long run, it virtually clears the space for entry of any foreign airlines. Wherein competition is going to be intense and only the fittest is likely to survive.

In addition, this should have been taken as an opportunity to close down, sale or lease out the Maharaja – Air India – that continuously drains the exchequer. The public sector airline is bleeding and no amount of infusion of funds will help get it out of the red. It would be wise for the Modi Government to unshackle the Maharaja and let it decide its own fate.

Also severe competition is also on the cards in the broadcasting sector – cable TV, mobile TV and DTH. This area will also see investments pouring in as it hopes to have a large Indian market.

Still many regions need services of various kinds. True, there is expectation that high-end clients might have tailor-made needs but the market at the lower end also has scope for expansion. There is circumspection too. As the competition intensifies, possibly many groups could exit as well.

Further, it is also to be seen how pharmaceutical companies bite the bullet. With the recent curbs on prices of scores of drugs, they might be a bit slow in investing given they are used to high profits. Certainly, social service is not in their blood. But if they decide to come, it is likely that there would be price wars to the benefit of the consumer.

Importantly, a major hitch for most foreign investors is our labour laws, despite these being mostly observed in the breach. Recently, India refused to accept WTO norms on labour which drew flak from the Bharatiya Mazdoor Sangh.

Yet, the Government has virtually introduced new norms as it announced the Rs 6000 crores textile package. Through this it expects creation of one crore jobs in the textile industry over the next three years. The Centre also plans to invest Rs 74,000 crores in textiles.

Furthermore, the Government has allowed short-term employment of up to 150 days against the earlier 240 days. But now these short-term workers would get wages equal to those employed on a regular basis.

What’s more the employees can opt out of the Employees Provident Fund (EPF) scheme and the Government would bear the cost of the EPF contribution and give relief to the employers. It Centre has also announced an Rs 5500 crores duty drawback for giving a boost to exports.

There is no gainsaying that hardcore trade unionists would see this as a dilution of the present norms. But in practice the industry has been doing this in different garbs. The new rules would at least ensure that all those working in the industry would be mentioned in the muster roll and get their legally fixed wages.

The EPF norm dilution would ensure that there would not be deduction as most such cuts went into dead EPF accounts whereby such small contributions were difficult to claim.

Clearly, these policies would attract foreign investors, who were till recently critical of India’s stringent laws. Simultaneously, it also burdens the Government with responsibility to protect the workers’ rights.

In sum, the policies apparently were formulated with precision over a period of time and announced in phases so that people could realize that the Government is in action mode.

But the industry and the Government have to do more to get real investment. According to industry grapevines strategies need to be sharpened which would expectedly have an impact in three to five years. All in all, followed up with élan it might change the face of India as a world manufacturing hub. ---- INFA

(Copyright, India News and Feature Alliance)