While the government’s plan to open up more sectors to foreign direct investment (FDI) has recently made headlines, experts say active reforms to make investments easier on ground and easing of complex, ever-changing regulations are need of the hour.
The government is looking to further ease FDI norms, with investments being allowed in certain sectors, which continue to have constraints, Commerce and Industry Minister Piyush Goyal had said on Saturday.
Sources confirm the Centre is actively looking to further relax FDI norms in sectors such as insurance and railway operations. The investment caps and restrictions in these sectors, among others, are under discussion.
Experts, however, point out that while a systematic opening up of more sectors to FDI is a welcome step, careful execution of existing policy measures are required.
“The main things that need to happen are on-ground execution and one-stop shop for getting all the approvals for setting up industries in states. We need “smart” manufacturing hubs all over the country where companies can come and plug in and start manufacturing products. This is so important for the food processing, apparel, and fast-moving consumer goods sectors to attract more investments,” said Rajat Wahi, partner (consulting), Deloitte India.
Goyal’s statement that further banking sector and capital market reforms are under way should also help FDI flows. “More than opening up of sectoral caps, I think the expectation would be on easing FDI flow into the economy. We need capital. Some sectors like financials need significant equity capital to flow in. And hopefully, the government’s announcements would allow these sectors to access capital more easily,” said Vivek Gupta, partner and head, M&A and PE Tax, KPMG India.
Clarity on norms and predictability of the regulatory regime are key components for augmenting FDI flows, Gupta added. “One expects to shortly see detailed guidelines for direct overseas listing of Indian companies. Across 40-60 companies, this one step by itself could lead to close to $20-25 billion of capital inflow in the next 12-18 months. With the plethora of control deals that one is seeing from large PEs, clarification on how beneficial ownership norms should be read, will also ease FDI flow,” he said.
Foreign direct equity investments in FY20 grew 14 per cent, a four-year high, to a record $49.8 billion, according to the data released by the Department for Promotion of Industry and Internal Trade (DPIIT) on Thursday. This came after tepid growth in equity investments, which had contracted 1 per cent in 2018-19 and risen only 3 per cent in the year ago.
But things have changed since the pandemic struck. The United Nations Conference on Trade and Development said inbound FDI into India may decline sharply in 2020 because of the coronavirus impact, the consequent lockdown measures, supply chain disruptions, and the economic slowdown.
While the Prime Minister’s Office has asked ministries to frame separate sectoral policies to secure investments, find markets, and boost production capacity, the government has not identified a single set of export-driven industry akin to electronics in Vietnam or apparel for Bangladesh.
“It is not possible for India to pinpoint its efforts into a handful of sectors, given the geographical spread and political realities,” said a senior policy advisor working with the DPIIT.
"India must continue its efforts to attract foreign investments in India by eliminating existing restrictions. For example, India’s insurance sector can significantly drive investment in manufacturing and the infrastructure sector, so India should consider lifting the FDI cap from existing 49 per cent to 100 per cent, and eliminating associated management control related clauses for joint ventures in the insurance sector," said United States-India Strategic Partnership Forum (USISPF) CEO Mukesh Aghi.
Similarly, FDI in the e-commerce space should be technology and business-model neutral and not restrict foreign investors to a specific kind of business model, Aghi added, welcoming further liberalisation in banking and retail.