The government has brought some impressive and telling changes in the FDI policy that may make the country a more open economy. Compared to the several rounds of the usual FDI policy changes of the past, which were marginal, the present modifications made on 20th of June 2016 indicate careful and powerful liberalization of FDI rules in three critical sectors – the sensitive and high growth food processing sector, strategic sector -defense and competitive sector -pharma.
Besides opening these sectors for more foreign sector participation, a remarkable policy shift was introduced in this policy as most of the sectors were placed under the automatic approval route, thereby reducing the prohibited small negative list.
According to the Prime Minister, with these changes, India is now the most open economy in the world for FDI. Following are the main features of this policy that makes the policy a radical liberalization attempt.
1. Food Product Industry
The most actively engaged sector by the domestic MSMEs is the food product industry. This is a high growth sector and is sensitive with the participation of large number of people. The government has decided to permit 100% FDI under government approval route for trading, including through e-commerce, in respect of food products manufactured or produced in India. Opening of the food product sector to big food MNCs is a game changer.
2. The FDI Defence Sector increased up to 100%
Defence is always a strategic sector. In the last year, the government has opened the sector for foreign investment up to 49%. Still there were several restrictions depending upon the type of technology used and shareholding participation by the foreign investor.
Previously, foreign investment above 49% were allowed depending under approval route on case by case if the project involves transfer state of the art technology.
But the new policy removes such state of the art technology conditionality and suggests just modern technology. This means that the effective foreign investment limit in defence is increased to 100% through approval route.
3. Pharmaceutical Sector:
A major push occurred in pharmaceuticals with respect to brown filed FDI. The sector witnessed several foreign firms taking over Indian firms. This is called brown field FDI. But such a practice adversely affects priorities of the country as it may cause control of the pharma sector by the MNCs. Hence the government has restricted brownfield FDI under automatic route.
But this policy permits up to 74% FDI under automatic route in brownfield pharmaceuticals and government approval route beyond 74% will continue.
4. Civil Aviation Sector:
In civil aviation sector, the new policy allows up to 100% FDI in domestic airlines and new airports. This will enable foreign companies to fully own Indian domestic carriers and greenfield (newly built) airports and up to 74% in existing airports.
5. Single Brand Retail Trading
The new policy allows foreign retailors to be exempt from local sourcing (purchasing goods/components from domestic suppliers) upto three years and for another five more years for entities undertaking Single Brand Retail Trading of products having ‘state-of-art’ and ‘cutting edge’ technology.
This will attract more foreign companies as they may get more time to find local suppliers. Several other sectoral limits also have been liberalized. In animal husbandry, the limit has been increased to 100%. In private security services sector, FDI up to 49% is now permitted under automatic route and FDI beyond 49% and up to 74% would be permitted with government approval route.
Altogether, the present FDI policy modification is a serious reform attempt that will open the Indian economy in a significant scale.