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A Critical Appraisal of FDI Policies of Government of India

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Foreign Direct Investment (FDI) means investment by non-resident entity/person outside India in the capital of an Indian company under Schedule 1 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.

FDI is one of the important drivers of economic development. It is a major non-debt financial source for India. That is the reason why the Government of India (GOI) tries to maintain a favourable FDI policy to ensure that foreign capital keeps flowing into the country and contributes to the national economic development.

Foreign (Direct) investment was introduced under Foreign Exchange Management Act (FEMA) 1991. The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry, Government of India makes policy pronouncements on FDI.  Since 1991, the GOI is gradually opening Indian economy for FDI to supplement the domestic capital, technology and skill requirements to accelerate economic growth. As of now FDI is allowed in almost all the major sectors of India economy. However, the sectors that attract higher inflows are services, telecommunication, construction activities and computer software and hardware.

As per the information available, the FDI inflow has been continuously increasing in India. In last one-and-half decade it has increased from USD 4 billion in 2000-01 to USD 44 billion in 2015-16. In the year 2016 itself, the total FDI investments received during April -September rose by 30% year-on-year (YoY).

FDI is allowed in India under the two routes: i) Automatic Route where FDI is allowed without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time. ii) Government Route where FDI in activities not covered under the automatic route requires prior approval of the Government which is considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, and Ministry of Finance.

The objective of the current write up is to understand the direction of the GOI on FDI policies. It also gives a brief insight into the various steps taken by the UPA and NDA governments in this area and their strategies. It is to be noted that the governing period for UPA-I is 2004-09 and UPA-II is 2009-14.  Similarly governing period for NDA-II is from 2014- to as on date.

To understand the direction of GOI on FDI policies, the FDI policies announced by the GOI between 2011 and 2016 have been studied.  This study is also supported by the empirical data on FDI inflow during 2001 to 2016 which reflects the FDI trend in India. The information required for the study has been accessed from Foreign Investment Promotion Board (FIPB) and Reserve Bank of India websites.

Review of FDI Policies:

The review of FDI policies can be done on various parameters. But to make it simple for readers only a few selected parameters have been considered for current study. The parameters are the three major aspects on which every new FDI policy will have an impact. They are:

  1. Status of the List of the Sectors in which FDI is allowed
  2. Limitation or Ceiling of FDI including related conditions.
  3. Rout through which FDI is allowed and its specific ceilings for routs.

Usually, a new FDI policy may include new sectors in the list, continue existing sectors without any change and exclude any of the sectors from the existing list. In terms of limitation or ceiling on FDI funds, the new policy may increase the limit; continue the same limit as per current policy and decrease the limit. It may also change the investment related conditions. Towards the route, the new FDI policy may change the route from automatic to government and vice-versa and change the sharing limit (ceiling) for the automatic and government routes. Apart from these three major aspects there will also be some changes in other conditions applicable to specific sector. Such changes have not been considered in the present article. Hence, the in present article we have briefly analysed the FDI policies on these three major aspects considering the FDI policy of 2011 as the base.

The different FDI policies announced during 2011 to 2016 are comprehensively presented in the seven ‘Consolidated Circulars on FDI Policies’ published by FDPI on their website.

As per the consolidated FDI policy circular dated October 2011, in comparison to the previous policy of April 2011, the FDI limit for Broadcasting – Terrestrial FM Radio is increased from 20% to 26% (FDI, NRI and Portfolio investment). The FDI route for Mining and exploration of metals and non-metal ores is revised to government route from automatic route. During the same period the FDI route for Petroleum & Natural Gas refining by the PSU is revised to automatic route from the government route.

The Private Security Agencies are included in the list of sectors in which FDI was allowed with a FDI limit of 49% and through only government route. There are five major changes in the FDI policy announced through the consolidated FDI circular of October 2011. Out of these five changes only one change makes FDI policy stringent and other four changes make the policy more flexible.

 As per the FDI policy announced during 2012, the FDI route for Petroleum & Natural Gas refining by the PSU is revised to government route from the automatic route. Through the same circular the FDI limit in Single Brand Retail Trading is increased from 51% to 100%. The Pharmaceutical existing companies and green field were included in the list of the sectors in which FDI was allowed. The FDI limit for both Pharmaceutical Existing Companies and Green-field Companies is 100%. But in case of Pharmaceutical Existing Companies FDI is allowed through only government route whereas in case of Pharmaceutical Green-field Companies it is allowed through the automatic rout.

There are six major changes in the FDI policy announced through the consolidated FDI circular of April 2012. Out of these six changes only one change has made FDI policy stringent and other five changes make the policy more flexible.

Through the FDI policy announced during 2013, the FDI limit for Cable Network (MSOs at National and State Level) industry, Broadcasting DTH industry, Asset Reconstruction Companies, Up-linking HUB / Teleports is increased from 49% to 74%.  In all the cases, except Asset Reconstruction Companies, the FDI up to 49% is allowed through automatic route and FDI above 49% up to 74% is allowed through Government route. In case of ARCs, the FDI up to 74% is allowed through government route only. In addition, Cable Network (Other MSOs at Local level) industry, Pharmaceutical Brownfield Companies, Power Exchanges, Multi-brand Retail Trading are included in FDI sectors list. The FDI limit for Cable Network (Other MSOs at Local level) industry is 49% and through automatic route. The FDI limit for Pharmaceutical Brownfield Companies is 100% and through only government route. The FDI limit for Power Exchanges is 49 (including FDI & FII) and through government rout. The FDI limit for Multi-brand Retail Trading is 51 (including FDI & FII) and through government rout.

There are fifteen major changes brought in the FDI policy announced through the consolidated FDI policy circular of April 2013. All the changes have been to make the policy more flexible.

In the FDI Policy announced during 2014, Mobile TV industry has been included in the list of industries in which FDI is allowed. In the case the FDI limit is kept at 74% and FDI up to 49% is allowed through automatic route and above 49% up to 74% is allowed through government route. During 2014 one of the most important changes brought in FDI policy is related to the defence sector. Keeping the FDI limit of 26% in the defence sector untouched, the GOI has created a provision to allow FDI above 26%. But the permission for FDI more than 26% in defence sector will be subjected to the approval of Cabinet Committee on Security (CCS) on case to case basis, wherever it is likely to result in access to modern and ‘state-of-art’ technology in the country.

In addition, through the same policy, the FDI limit in case of Asset Reconstruction Companies (ARCs) is increased from 74% to 100% of the paid up capital and the FDI up to 49% in ARCs is allowed through automatic route and FDI above 49% up to 100% is allowed through government route. The FDI route for Commodity Exchange, Credit Information Companies, Infrastructure Company in the Securities Market is revised from government to automatic route. Moreover, the FDI limit of 26% in insurance sector was caped limiting the investment from all the sources such as FDI, FII/FPI, and NRI to maximum limit of 26%. In the same policy the FDI route for Power Exchanges is revised from government route to automatic route. FDI limit for Teleservices is increased from 74% to 100% and FDI up to 49% in this sector is allowed through automatic route and above 49% and up to 100% is allowed through government route. The FDI route, in case of Single Brand Retail trading, is revised from 100% government route to 49% automatic route and above 49% through government route.

There are thirteen major changes brought in the FDI policy announced through the consolidated FDI circular of April 2014. Out of thirteen changes only one change has been done to make FDI policy stringent and other twelve changes have been brought to make the policy more flexible.

In FDI policy announced during 2015, the FDI limit in defence sector is increased from 26% to 49% with a condition that investments from all the sources such as FDI, FII/FPI, NRI and FVCI should not be more than the prescribed limit of 49% and that FDI will be allowed only through government route. Moreover, a provision to allow FDI more than 49% in defence sector is also created. But the permission for FDI more than 49% in defence sector will be subjected to the approval of Cabinet Committee on Security (CCS) on case to case basis, wherever it is likely to result in access to modern and ‘state-of-art’ technology in the country. The FDI limit for Credit Information Companies increased from 49% to 74% where investment from FII/FPI is limited to 24%. The FDI limit for Insurance sector is increased from 26% to 49% with a condition that the investment from all the sources such as FDI, FII/FPI, QFI, NRI, FVCI, and DR should not be more than the prescribed maximum limit of 49%. In this case the FDI up to 26% is allowed through automatic rout and above 26% up to 49% it is allowed through government rout. The FDI entry  for Petroleum & Natural Gas refining by the PSU is revised from government route to the automatic route. One of the important changes in the FDI policy of 2015 is that in the list of the sectors in which FDI is allowed, Railway infrastructure sector is included. The FDI limit in this sector is 100% and FDI up to 49% is allowed through automatic rout and the FDI beyond 49%, in sensitive areas from security point of view, will be brought by the Ministry of Railways before the Cabinet Committee on Security (CCS) for consideration on a case to case basis.

There are eight major changes brought in the FDI policy announced through the consolidated FDI policy circular of April 2015 and all the changes make the policy more flexible.

Under FDI policy announced during 2016, the FDI limit for Cable Network (MSOs, at State and National Level), Cable Network (Other MSOs, at Local Level), Mobile TV, DTH and Hits increased to 100%. The FDI up to 49% is allowed through automatic route and above 49% up to 100% through government route. The FDI limit for Terrestrial FM Radio is increased from 26% to 49%. The FDI limit for Civil Aviation Ground Handling and Non-schedule Air Transport services is increased from 74% to 100% and allowed through automatic route.  The condition that the investment in defence from all the sources such as FDI, FII/FPI, NRI and FVCI should not be more than the prescribed limit of 49%, is relaxed in 2016 FDI policy. Similarly, the conditions related to the sources of investment in the case of Private Sector Banking, ARCs, Public Sector Banking, Infrastructure Company in the Securities Market, Insurance, Power Exchanges have also been relaxed. Further, the FDI route in case of ARCs is revised to 100% through automatic route. Similarly in the case of Insurance the route is revised to 49% though automatic route.  Pension, White Lable ATM Operations, Duty Free Shops are included in list of sectors in which FDI is allowed. The FDI limit in the respective sectors is 49%, 100% and 100% and allowed through automatic rout.

The condition for manufacturing sector which is “FDI in MSEs will be subject to the sectoral caps, entry routes and other relevant sectoral regulations. Any industrial undertaking which is not a Micro or Small Scale Enterprise, but manufactures items reserved for the MSE sector would require Government route where foreign investment is more than 24% in the capital” This condition is revised as  “subject to the provisions of the FDI policy, foreign investment in ‘manufacturing’ sector is under automatic route. Further, a manufacturer is permitted to sell its products manufactured in India through wholesale and/or retail, including through e-commerce without Government approval”.

The FDI rout for Plantation sector is also revised from government to automatic rout. The FDI limit for Satellite establishment and operations and Up-linking HUB / Teleports increased from 74% to 100%. In case of Satellite establishment and operations, the 100% FDI allowed through only government rout whereas the FDI in Up-linking HUB / Teleports up to 49% is allowed through automatic rout and above 49% through government rout. The FDI limit in Up-linking/Down-linking of News and Current Affairs’ TV Channels is increased from 26% to 49%. The FDI rout for Up-linking/Down-linking of Non-news and Current Affairs’ TV Channels is revised to automatic from government.

There are 33 major changes brought in the FDI policy announced through the consolidated FDI policy circular of April 2016 and all the changes are made to make the policy more flexible.

As per the available information, during 2011 to 2016 we have noted around 80 changes in the FDI policies of the GOI on the three major aspects discussed above. Out of the total number of changes noted in the current review, more than 40% are made in the year 2016. From the information discussed above, it is very much clear that during last five years the GOI of India has revised the FDI policies to make it more open, flexible and favourable for the foreign investors.

It is noteworthy to mention that in case of FDI policy, the NDA government led by the BJP which claims its policies to be more ‘Swadeshi’ has left behind the UPA government led by Congress which is said to have adopted pro-foreign-investor policies.

Please refer to the Table-1 and Graphs 1 & 2 below for a quick glance of government’s FDI policy direction.

Table-1: Major FDI Policy Changes Made During April 2011 – April 2016

FDI Policy Dated No. of Major Changes Towards Stringent Towards Flexibility
April 2011 (Base) 0 0 0
October 2011 05 01 04
April 2012 06 01 05
April 2013 15 00 15
April 2014 13 01 12
April 2015 08 00 08
April 2016 33 00 33
Total (2011-2016) 80 03 77

However, it can be easily seen that the GOI, irrespective of the parties in power, has kept a flexible and favorable FDI policy.

FDI Inflows- A Trend Analysis

Having reviewed the FDI policies of GOI announced during 2011 and 2016 let us find the FDI inflow trend in India for the period 2001-2016. As represented in the Table-2 below, the FDI inflow during 2000-01 is USD 4 billion. It increased to around 44 billion by 2015-16 and may even cross USD 45 billion by 2017-18.

There has been a ten times increase in FDI inflow in last one and half decade. Due to the favorable policies announced during the said period the FDI inflow has increased with an average rate of 22% p.a. and CAGR (compound annual growth rate) of 17.2% p.a.  Please refer to the Table-2 and Graph-3 for a quick glance of the FDI inflow trend in India during 2000-01 to 2016-17.

Table-2: FDI Inflow for the period 2000-01 to 2016-17

Year FDI in India (USD Billion) % of Change
2000-01           4.03                –
2001-02           6.13           51.9
2002-03           5.04         (17.8)
2003-04           4.32         (14.2)
2004-05           5.99           38.5
2005-06           8.90           48.7
2006-07         22.74         155.5
2007-08         34.73           52.7
2008-09         41.74           20.2
2009-10         33.11         (20.7)
2010-11         29.03         (12.3)
2011-12         32.95           13.5
2012-13         26.95         (18.2)
2013-14         30.76           14.1
2014-15         35.28           14.7
2015-16         44.91           27.3
2016-17         43.77           (2.7)

Source: RBI 2016-17 provisional figures

It is apparent from the data presented in Graph-3 above that the overall FDI inflow trend has been positive since 2000-01. It does not have any impact on FDI inflow that which party has formed the government, the FDI inflow continued to be increasing.

In fact the attitude of the political parties like Congress and BJP on FDI policy seems to be changing only in relation to their position. They have different attitudes when they are in power as compared to when in opposition. For instance, in 2012, when the UPA government announced 51% FDI in retail, the BJP called for a nation-wide bandh opposing the supposedly anti-retail move. But now when in power BJP has announced 100% FDI in the same sector.

Moreover, FDI policies adopted by the previous government are left untouched by the present government.

Conclusion:

In the conclusion it can be said that in Indian context, neither FDI is fully harmful nor it is fully fruitful. However, a small miscalculation while deciding the foreign investment policy on the side of policy makers shall make FDI a burden on the Indian economy and upon the citizens of India. Therefore, the Government of India (GOI), while choosing the policy towards foreign investments should take necessary precautions, considering both economic and social factors, to avoid any potential negative effects of allowing FDI in India.

Website References:

https://www.rbi.org.in/

http://dipp.nic.in/English/Default.aspx

 

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