Editorial Notes

[Editorial Notes] On FDI rule changes in India

The government recently announced a slew of measures aimed at facilitating greater foreign investment in the country. But they need to be accompanied by reforms, especially factor market reforms, that address the structural issues plaguing the economy and also continuation of overvaluation of the rupee needs to be attended.
By IASToppers
September 03, 2019

Contents

  • Introduction
  • Key features of the new Rules
  • Previous Rule
  • How it will help India?
  • Challenges to the foreign mining companies
  • Conclusion

On FDI rule changes in India

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Introduction

  • The government announced a slew of measures aimed at facilitating greater foreign investment in the country.
  • The step appears to be one more push to make India a more attractive destination to overseas investors, especially those keen on entering the market for the long haul.
  • The new rules provided for a relaxation of the contentious sourcing norms which have been a major deterrent for foreign investment in single-brand retail.

fdi

Key features of the new Rules

  • Firms can adjust their entire procurement from India, be it for their domestic operations or for global markets, against their local sourcing requirements. The local sourcing norms need not be met annually, but as an average of the first five years.
  • Sourcing will be counted towards their domestic sourcing obligations.
  • Single brand retailers have also been allowed the option of setting up their online retail platforms before putting in place a brick and mortar presence.
  • The government has allowed 100 per cent FDI in contract manufacturing and in coal mining and related activities such as washery, handling and separation.

Previous Rule

coal-india

  • Only Coal India Ltd (CIL) could mine and sell coal in the country before the above announcement. Along with CIL, private and public sector companies with captive mines were allowed to mine and sell 25 per cent of coal in the open market.

How it will help India?

  • As the trade war between the US and China showing no signs of resolving, foreign companies are increasingly reassessing their operations.
  • India has not been able to take advantage of this ongoing relocation. But the new rules should gradually facilitate foreign firms setting up manufacturing bases in India which will provide a boost to both employment and exports.

coal fdi

  • 100 per cent FDI in contract manufacturing through the automatic route will also attract global players looking to set up alternate manufacturing hubs.
  • Adding exports to the local sourcing norms will also encourage the building of larger production facilities and will provide a much needed fillip to the India’s subdued exports.
  • Post FDI Relaxation, single brand retailers can start online sales; earlier, it was mandatory foreign retailers to set-up brick and mortar shop. Now retailers can open webstore without having offline presence in India.
  • Sectors which are likely to benefit the most include electronics, mobiles, apparel and pharma.
  • The move to have 100 per cent FDI in contract manufacturing will open the gates for global electronic goods manufacturers to set up shop in India and also overcome their concerns on intellectual property rights.
  • It will also raise domestic supply of the key raw material for power, steel and cement production thereby cutting costly and burgeoning imports.

Criticism of the changes made in FDI Rule

  • The FDI changes are unlikely to have an immediate effect on India’s economic growth and capital flows into the country.
  • The decision of allowing 100 per cent FDI under the automatic route in contract manufacturing and coal mining can facilitate significant domestic and foreign investment but only if structural demand-side and regulatory challenges are addressed.
  • Considering the slowdown in demand conditions, increasing the FDI limit is unlikely to be sufficient to attract greater long-term FDI flows into the economy.
  • The coal sector requires ease of doing business to be enhanced significantly through measures like rationalisation of regulatory procedures like the land acquisition. Private sector investment in captive coal mines are minimal owing to regulatory challenges and uncertainties, along with lack of excavation infrastructure.
  • The environmental costs of investment norms on one of the most polluting fossil fuels -coal, is huge.

Challenges to the foreign mining companies

  • For foreign mining companies to become successful, several related regulatory and market challenges will have to be addressed post new FDI rules.
  • Large miners will need economies of scale and so require access to large contiguous fields with minimal bureaucratic constraints on operations.
  • While domestic thermal power plants have had to rely on increased imports in recent times, many of the electricity producers themselves are in financial stress.

Conclusion

  • These initiatives are an attempt to create a manufacturing ecosystem, establishing value chains with both upstream and downstream linkages.
  • However, they need to be accompanied by reforms, especially market reforms, that address the structural issues plaguing the economy and also continuation of overvaluation of the rupee needs to be attended.

 

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