The easing of foreign direct investment (FDI) norms and simplification of some procedures, announced by the government last week, should spur the economy, help to create more jobs and improve the business environment in the country. The changes are incremental in nature and are in line with the existing liberalisation policy, which has produced good results. The changes could only be gradual in a complex economy with legacy issues where diverse interests and political views have to be managed. The FDI inflow has been steadily rising, reaching a record $60 billion in 2016-17. The trend should accelerate now. The main features of the latest changes to policy are approval of 100% FDI for single brand retail via the direct route, relaxation in sourcing norms, permission for foreign airlines to invest up to 49% in Air India and relaxed norms for investment in power exchanges, pharmaceuticals and construction and real estate broking sectors. FDI infusion often makes businesses more competitive and efficient. It means not only inflow of capital but also introduction of better technologies and management practices.
The change in single brand retail investment norms meets a longstanding demand. Till now, FDI through automatic route was allowed only up to 49% and beyond that specific approvals were needed. The relaxation of the 30% local sourcing norm removes a major impediment for giants such as Apple, the maker of iPhones and iPads, which wants to set up its own retail stores in India. Investing companies have now been allowed a five-year window to comply with the 30% sourcing norm. This is to facilitate the building of local supply chains, but the aim should actually be to push companies to develop a complete production ecosystem within the country. The arrival of foreign brands in consumer goods will create more jobs. The notion that allowing foreign brands into retail will lead to loss of jobs and threaten local businesses is not correct. It can actually help local players and local brands to grow, as seen in China. Indeed, the government must make bold to open up the country to multi-brand retail, too.
The permission for 100% FDI in construction may help the real estate sector, whose growth can again create jobs and boost many related sectors. Foreign investment in power exchanges through the primary market is a major positive for that important sector. All these reforms, in conjunction with legislations like those on real estate regulation and insolvency and bankruptcy code, should make a difference to the economy by drawing in more investment and contributing to the ease of doing business. There can also be a mutually beneficial interaction between the businesses where FDI norms have been relaxed and the government’s ‘Make in India’ initiative, which is yet to take off.