Posted in Indian Economy

FDI Policy And Its Impact

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updated on August 31st, 2019

Present Scenario in FDI in India and World

  • These reforms have contributed to India attracting record FDI inflows in the last 5 years. Total FDI into India from 2014-15 to 2018-19 has been the US $ 286 billion as compared to the US $ 189 billion in the 5-year period prior to that (2009-10 to 2013-14). In fact, total FDI in 2018-19 i.e. the US $ 64.37 billion (provisional figure) is the highest ever FDI received for any financial year.
  • Global FDI inflows have been facing headwinds for the last few years. As per UNCTAD’s World Investment Report 2019, global foreign direct investment (FDI) flows slid by 13% in 2018, to US $1.3 trillion from US $1.5 trillion the previous year – the third consecutive annual decline. Despite the dim global picture, India continues to remain a preferred and attractive destination for global FDI flows. However, it is felt that the country has the potential to attract far more foreign investment which can be achieved inter-alia by further liberalizing and simplifying the FDI policy regime.

FDI Policy And Its Impact

Foreign direct investment (FDI) is an important driver of economic growth which helps in—sustaining a high growth rate, increasing productivity, a major source of non-debt financial resources, and employment generation. A favorable policy regime and sound business environment facilitate FDI flows.

The government has taken various reforms to liberalize and simplifying the FDI policy to provide ease of doing business climate in the country that will also lead to larger FDI inflows. A number of sectors have been liberalized, including defense, construction, broadcasting, civil aviation, plantation, trading, private sector banking, satellite establishment and operation, and credit information companies. By early 2017, the government had taken the following policy steps to promote FDI in the economy:

(i) Up to 49 percent, FDI permitted in insurance and pension funds (26 percent under automatic route) and defense sector.
(ii) 100 percent FDI permitted in the manufacturing of medical devices; the white label ATM and railway infrastructure.
(iii) 100 percent FDI allowed in the marketing of food products produced and manufactured in India (Union Budget 2016–17).
(iv) To undertake important banking sector reforms and public listing of general insurance companies undertake significant changes in FDI policy (Union Budget 2016–17).
(v) Reforms in FDI policy in the areas of Insurance and Pension, Asset Reconstruction Companies, Stock Exchanges (Union Budget 2016–17).
(vi) A new policy for management of the PSUs, including strategic disinvestment—this is supposed to have liberal provisions for the FDI (Union Budget 2016–17).

Policy Reforms in FDI in August 2019

Coal Mining

As per the present FDI policy, 100% FDI under automatic route is allowed for coal & lignite mining for captive consumption by power projects, iron & steel, and cement units and other eligible activities permitted under and subject to applicable laws and regulations. Further, 100% FDI under automatic route is also permitted for setting up coal processing plants like washeries subject to the condition that the company shall not do coal mining and shall not sell washed coal or sized coal from its coal processing plants in the open market and shall supply the washed or sized coal to those parties who are supplying raw coal to coal processing plants for washing or sizing.

It has been decided to permit 100% FDI under automatic route for sale of coal, for coal mining activities including associated processing infrastructure subject to provisions of Coal Mines (special provisions) Act, 2015 and the Mines and Minerals (Development and regulation) Act, 1957 as amended from time to time, and other relevant acts on the subject. “Associated Processing Infrastructure” would include coal washery, crushing, coal handling, and separation (magnetic and non-magnetic)

Contract Manufacturing

  • The extant FDI policy provides for 100% FDI under the automatic route in the manufacturing sector. There is no specific provision for Contract Manufacturing in the Policy. In order to provide clarity on contract manufacturing, it has been decided to allow 100% FDI under the automatic route in contract manufacturing in India as well. 
  • Subject to the provisions of the FDI policy, foreign investment in the ‘manufacturing’ sector is under the automatic route. Manufacturing activities may be conducted either by the investee entity or through contract manufacturing in India under a legally tenable contract, whether on Principal to Principal or Principal to Agent basis.

Single Brand Retail Trading (SBRT)

  1. The extant FDI policy provides that 30% of the value of goods has to be procured from India if the SBRT entity has FDI of more than 51%. Further, as regards local sourcing requirement, the same can be met as an average during the first 5 years, and thereafter annually towards its India operations. With a view to providing greater flexibility and ease of operations to SBRT entities, it has been decided that all procurements made from India by the SBRT entity for that single brand shall be counted towards local sourcing, irrespective of whether the goods procured are sold in India or exported. Further, the current cap of considering exports for 5 years only is proposed to be removed, to give an impetus to exports.
  2. The extant Policy provides that as regards local sourcing requirements, incremental sourcing for global operations by the non-resident entities undertaking single-brand retail trading, either directly or through their group companies, will also be counted towards local sourcing requirement for the first 5 years. However, prevalent business models involve not only sourcing from India for global operations by the entity or its group companies, but also through an unrelated third Party, done at the behest of the entity undertaking single-brand retail trading or its group companies. In order to cover such business practices, it has been decided that ‘sourcing of goods from India for global operations’ can be done directly by the entity undertaking SBRT or its group companies (resident or non-resident}, or indirectly by them through a third party under a legally tenable agreement.
  3. The extant policy provides that only that part of the global sourcing shall be counted towards local sourcing requirement which is over and above the previous year’s value. Such requirement of a year-on-year incremental increase in exports induces aberrations in the system as companies with lower exports in a base year or any of ‘ the subsequent years can meet the current requirements, while a company with consistently high exports gets unduly discriminated against. It has been now decided that entire sourcing from India for global operations shall be considered towards local sourcing requirements. (And no incremental value)
  4. The present policy requires that SBRT entities have to operate through brick and mortar stores before starting the retail trading of that brand through e-commerce. This creates an artificial restriction and is out of sync with current market practices. It has therefore been decided that retail trading through online trade can also be undertaken prior to the opening of brick and mortar stores, subject to the condition that the entity opens brick and mortar stores within 2 years from the date of start of online retail. Online sales will lead to the creation of jobs in logistics, digital payments, customer care, training, and product skilling.

Digital Media

The extant FDI policy provides for 49% FDI under the approval route in the Up-linking of ‘News &Current Affairs’ TV Channels. It has been decided to permit 26% FDI under government route for uploading/ streaming of News & Current Affairs through Digital Media, on the lines of print media.

PS : How to prepare Indian Economy for UPSC ?

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