Source: The Hindu Business Line

Besides increase in sectoral caps, simplification of procedures under FDI Policy will improve investment climate

Since the launch of the ‘Make in India’ initiative in September 2014, the markets have seen a 48 per cent increase in foreign direct investment (FDI), equity inflows (from September 2014 to April 2015). There was also a total increase of 27 per cent in FDI inflows in 2014-2015, compared with the preceding financial year. The services sector including banking, insurance, outsourcing, R&D and technology has been the largest contributor to FDI inflows; this was followed by the construction and development sector. While the policy changes to attract FDI investments are welcome, there may be more that can be done.

Easing sectoral caps

One such change can be in the defence sector, where many foreign players have expressed interest in collaborating with Indian companies. The existing Consolidated Foreign Direct Investment Policy 2015, (FDI Policy) limits foreign investment in certain sectors by enforcing sectoral caps and minimum capitalisation requirements. The sectoral cap in the defence sector was increased recently to 49 per cent; other norms, such as simplifying the application process for an industrial licence was relaxed; the list of equipment that require industrial licences was reduced. The government could further consider increasing the sectoral cap to 74 per cent and liberalising the offset policies to boost manufacturing.

The liberalisation theme could be extended to the services sector, such as the private banking industry, currently at 74 per cent, (49 per cent under the automatic route). Increasing sectoral cap in private banking to 100 per cent would harmonise with the scheme of the RBI, which allows foreign banks to set up wholly owned subsidiaries in India.

Further, in the light of the recent approvals granted to Hathway Cable and Den Networks for FDI of up to 74 per cent each, an increase in the sectoral cap in the broadcasting sector is another initiative that could facilitate faster digitisation and help propel the ‘Digital India’ campaign. Similarly, a 100 per cent limit for ground handling services under the civil aviation industry would enable companies to adopt international standards of quality in such services.

Simpler procedures

In addition to increase in sectoral caps, simplification of procedures under the FDI Policy would substantially improve the milieu for foreign investors. The Department of Industrial Policy & Promotion has made provision for electronic filing, though there is room for further improvement and simplification. For one, applications for approval under the extant FDI Policy take as long as two to three months. Such delays could be addressed by frequent sittings of the Foreign Investment Promotion Board and/or delegation of powers to industry-specific sub-committees for prompt scrutiny and recommendations.

Further, the Foreign Exchange Management Act, 1999, does not provide for a mechanism to file for compounding of contraventions of provisions online. Currently, the RBI or its delegated authorities take up the adjudication of the application. Allowing electronic applications until the hearing stage would decrease costs, save time and make the process less cumbersome.

For a meaningful and lasting effect, policy improvements must be bolstered by infrastructure initiatives and labour reform. Onerous labour regulations and lack of infrastructure facilities have made foreign investors wary of investing. The Finance Minister, while acknowledging that India’s infrastructure growth does not match its ambitions, increased the allocation to the Ministry of Roads and Highway by 48 per cent in the Budget for 2015-16.

The government is contemplating reforms and is encouraging State-wise reforms to remove some onerous provisions in labour laws. Initiatives in these areas could be beneficial in the medium to long term. These are merely indicative of a holistic approach needed to improve global perception of doing business in India. Recently, the government met with senior bankers and industrialists to deliberate on economic reforms in the light of the global economic scenario. These are steps in the right direction; one hopes that the government will continue to adopt such a consultative approach – by involving industry experts and practitioners in formulating and revising policies to enhance confidence.