Easing of Caps on FDI in Defence, Insurance and Railways

Economic Diplomacy

FDI in India is done across a wide range of industries and its relentless influx reflects the tremendous scope, faith and trust that foreign investors have in the Indian economy

As per the International Monetary Fund (IMF), Foreign Direct Investment, commonly referred to as FDI, is an investment made to acquire lasting or long-term interest in enterprises operating outside of the economy of the investor. The economic development witnessed during the past two decades in India rests to a great extent on FDI, which has been a vital non-debt financial force behind the economic upsurge in India. FDI in India is done across a wide range of industries and its relentless influx reflects the tremendous scope, faith and trust that foreign investors have in the Indian economy.

To ensure an uninterrupted inflow of FDI in India, the Indian government has created conducive trade atmosphere and effective business policy measures are in place. This strategy is reflected in the steps taken by the government, such as easing out the restrictions levied on sectors such as stock exchanges, power exchanges, defence, telecommunications and PSU oil refineries to name a few. The Union Cabinet, chaired by Prime Minister Narendra Modi, had given its approval to review of FDI Policy on investments by Non-Resident Indians (NRIs), Persons of Indian Origin (PIOs) and Overseas Citizens of India (OCIs).

In the last one year, the government has taken a number of reform measures ranging from policy corrections to bold economic reforms. On FDI policy, measures taken by the government are historic and far reaching. To begin with, the government first reviewed the FDI policy in defence and railways sectors.

The government had taken some time to take a decision on easing FDI in the Railways and Defence production. The Department of Industrial Policy & Promotion (DIPP) after receiving various comments from the ministries concerned sent the proposals to the Union cabinet. In 2014, DIPP secretary Amitabh Kahnthad stated that the Cabinet Committee on Economic Affairs had approved FDI cap of 49 percent in insurance, against 26 percent till then, and the Cabinet notes for the railways and defence were under the final consultative process.

The FDI limit in the sensitive defence sector is raised to 49 percent from 26 percent, with the condition that control in joint ventures for manufacturing of defence equipment will remain in Indian hands. This ensures control to boost domestic industry of a country that imports up to 70 percent of its military hardware. The limit is composite in nature as it includes foreign investment in forms of foreign portfolio investment, foreign institutional investment, qualified foreign investment, foreign venture capital investment and non-resident investment.

There were also plans to ease FDI norms for the cash-starved Indian Railways. The sector was facing a cash crunch of about Rs 26,000 crore as per estimates. DIPP had proposed 100 percent FDI in areas such as high-speed train systems, suburban corridors and dedicated freight line projects implemented under Public Private Partnership (PPP) mode. The Union Cabinet has cleared a proposal that allows 100 percent FDI in railways infrastructure, excluding operations. Though the initiative does not allow foreign firms to operate trains, it allows them to create the network and supply trains for bullet trains etc. The FDI liberalisation in the railways sector would help in modernisation and expansion of the railways.

To make investment more attractive in the services sector, the government has raised the FDI cap in insurance sector to 49 percent from 26 percent. With the government taking steps to improve ease of doing business and attracting investments, FDI inflows into the services sector grew by over 46 percent to $3.25 billion in 2014-15. The services sector, which includes banking, insurance, outsourcing, R&D, courier and technology testing, had received FDI worth $2.22 billion in 2013-14. The government announced a series of steps such as fixing timeliness for approvals to improve the ease of doing business in the country and attracting domestic as well as foreign investments.

Services contribute about 60 percent to India’s GDP. According to the Department of Industrial Policy and Promotion (DIPP) data, the total foreign inflow in 2014-15 in the services sector was low as compared to 2012-13 when it was $4.83 billion. In step with the growth in FDI in important sectors like services, overall foreign inflows in the country also rose by 27 percent to $30.93 billion during the previous fiscal. The amount was $24.29 billion in 2013-14.

The foreign inflows have reached $25.52 billion during April-January 2014-15, up 36 percent year-on-year (y-o-y), from $18.74 billion in the corresponding period last fiscal, according to DIPP data. The top five sectors receiving FDI were:

India received the maximum FDI from Mauritius followed by Singapore, the Netherlands, Japan and the US during April-January 2014-15 period as shown below:

Deals worth $3.4 billion across 118 transactions were struck in January 2015 in India, compared with $1.6 billion across 87 transactions in January 2014 and $1.2 billion across 74 deals in January 2013, according to a Grant Thornton report on Merger and Acquisition (M&A) and Private Equity (PE) activity. Inbound deals have more than tripled in value, led by the Herman-Symphony transaction worth $780 million and three other deals worth more than $100 million each.

Foreign investments are considered crucial for India, as it requires around $1 trillion in the 12th Five-Year Plan (2012–17), to fund infrastructure growth covering sectors such as highways, ports and airways. Growth in foreign investments helps improve the country’s Balance of Payments (BoP) situation and strengthens the rupee.

The Indian government’s policy regime and a robust business environment have ensured that foreign capital keeps flowing into the country. The government has taken many initiatives in recent years such as relaxing FDI norms across sectors. The continuous inflow of FDI in India, which is now allowed across various industries, clearly shows the confidence that overseas investors have in the country’s economy. FDI is also a major source of non-debt financial resource for the economic development of India. Foreign companies invest in India to take advantage of cheap labour, special investment privileges such as tax exemptions, etc. This results in updating technical know-how and employment generation.

Based on the recommendations of Foreign Investment Promotion Board (FIPB) in its meeting held on February 17, 2015, the government has approved ten proposals of FDI amounting to Rs 2,857.83 crore i.e. $452.72 million approximately. Insurance Australia Group Ltd (IAG) is set to raise its stake in its general insurance joint venture with the State Bank of India from 26 percent to 49 percent, in the first such instance after Parliament cleared a bill on March 12, 2015 that raised the maximum permitted foreign stake in insurance sector. Keiretsu Forum, a global angel investor network with 1,400 accredited members, has forayed into India by opening a chapter in Chennai.

Foreign investment inflows are expected to increase by more than two times and cross the $60 billion mark in 2015 as against $29 billion during 2013-14, as foreign investors have gained confidence in India’s new government, as per an industry study. This requires support in terms of FDI. Easing the norms for FDI in the defence sector and railways infrastructure is a step that the government hopes will help save on foreign exchange and boost manufacturing to spur growth in the broader economy. Efforts are being made to bring India into the top 50 ranks in the index of ‘Ease of Doing Business’. India has been ranked 142 among the 189 countries in the latest report, falling two places from the last year’s ranking.

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Ms. Surbhi Arora

Ms. Surbhi Arora has over twenty-three years of rich experience in Finance, Project Management, Company Secretarial work and Academics. She did her masters’ both in Economics and Law, and is UGC NET qualified in Economics and has the prestigious Accountant Technician Certificate from the Institute of Chartered Accountants of India. She has the Lifetime Membership of Indian Accounting Association. Presently, she is working as an Assistant Professor (Senior Scale) in the Academic Unit, CCE, at the University of Petroleum & Energy Studies.

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