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A Peep into the FDI Reforms

September 6, 2019

[Dibya Prakash Behera is the Manager and Editor at IRCCL.]

 

With the Indian economy facing a severe slowdown with GDP plummeting down to new lows, the Central Government, in a sigh of relief, has relaxed certain foreign direct investment (FDI) norms. In a slew of reforms, it has allowed 100% foreign investment in coal mining and contract manufacturing, eased sourcing norms for single-brand retailers and approved 26% overseas investment in digital media in order to boost economic growth from a five-year low.

 

In the single-brand retail trading (SBRT) sector, it has now allowed companies to conduct online retail trading prior to the opening of physical stores, subject to the condition that brick-and-mortar stores come up within two years from the date it starts online operations. This has been introduced with an objective to create employment opportunities in sectors such as logistics, digital payments, customer care, training, and product skilling. Such a decision has paved the way for major global brands to go online in India. This comes at the right juncture with the majority of the companies looking to shift their base out of China due to the ongoing trade war with the USA. It is expected that over 40 major retail brands would venture into India with their online presence and bolster their sales with a brick and mortar store after two years. The move will not only benefit the SBRT but also the consumers as they will have the option to choose from a large variety at competitive prices.

 

Easing norms for single-brand retail sourcing, the Cabinet has decided that all procurements made from India by the entity for that single brand shall be counted towards local sourcing of 30%, irrespective of whether the goods procured are sold in India or exported. Furthermore, under the extant FDI policy, sourcing of goods from India for global operations could be done either directly by the entity undertaking SBRT or its group companies (resident or non-resident}. In order to expand the scope, the Cabinet has decided to include within its ambit sourcing done indirectly by them through a third party under a legally tenable agreement, thereby providing a much larger scope for the SBRT entities to meet the sourcing criteria easily. Moreover, the current cap of considering exports for five years only has been done away with to provide a much-needed impetus to exports.  

 

This comes as a huge relief for the technology sector especially the mobile handset companies such as Apple. It is imperative to note that under the extant policy, local sourcing through its contract manufacturer Foxconn was not accounted for in its sourcing obligation, thereby being an impediment for the tech giant to set up its manufacturing hub in India. The rule has long been a hurdle in the path of the tech companies such as Xiaomi and LeeCo with the companies seeking for exemptions from the sourcing obligation on the ground of their technology meeting the standards of ‘state of art’. The waiver was never realistically possible. With the introduction of such a reform, the business of the tech companies would see the much needed boost. Moreover, the likes of Ikea and H&M that already source products from India for their global business will receive a boost in their sales.

 

Under the current policy, 100% FDI under the automatic route was limited to coal and lignite mining for captive consumption in power projects, iron and steel, and cement units. With the recent reforms in place, the ambit has been now widened to cover the sale of coal and mining, including associated processing infrastructure such as coal washery, crushing, coal handling, and separation (magnetic and non-magnetic). Merchant mining albeit being given importance in the first term of the current government has failed to show significant progress. Coal mining has long been a state monopoly with Coal India being the largest and prominent player. With the opening up of the sector to foreign investments, merchant mining is expected to see a boost which might put an end to India’s long standing practice of importing coals despite having the world’s largest reserves of coal. The reform might also bolster the growth of clean coal technologies in India, which seem to be one of the foremost concerns in this environmentally conscious world.

 

As far as contract manufacturing is concerned, the present FDI policy never addressed the issue in specific but allowed for 100% FDI under automatic route in the manufacturing sector. The Cabinet has now clarified that the same provisions shall also be made applicable for contract manufacturing with the condition that there must be a legally tenable contract, whether on principal-to-principal or principal-to-agent basis for the provision of such services. With sectors such as pharmaceuticals relying heavily on contract manufacturing, they are expected to gain massively from such reforms. Setting up a factory in India consumes months and many hurdles. The opening up of contract manufacturing to FDI will ensure that global firms invest in such companies thereby speeding up their entry in the Indian market.

 

The most notable of all reforms is the decision of the government to allow 26% FDI under the government route for uploading/ streaming of news and current affairs through digital media on the lines of print media. With the Central Government's stance still unclear on the fate of Over The Top platforms i.e. streaming of media services directly to viewers , it remains to be seen whether platforms such as Zee5, Hotstar, Voot and others which have both entertainment and news content would be covered under the 26% or 49% regime. It is imperative to note that the FDI policy currently allowed for 49% FDI (approval route) in broadcast content services. With the new reforms in place, the fate of the platforms and aggregators such as VCCircle, Huffington Post, Dailyhunt and Bloomberg Quint remains undecided. 

 

Nevertheless, with such reforms at place, the government has ensured that the existing FDI policy regime is simplified and liberalised in a pragmatic sense improving ease of doing business in India. Moreover, the changes have the potential to attract larger volumes of foreign investment inflows driving economic growth and development and creating large scale employment opportunities. However, the government might have a task in their hand to issue clarifications pertaining to the digital media sector for ensuring feasible operations of all the stakeholders involved.

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