Explained! Effects of New FDI norms in India.


4 min read
Explained! Effects of New FDI norms in India.

A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country.

Foreign Direct Investment by non-residents into India is regulated through two routes –Automatic route and Approval route.

Automatic route

The automatic route stands for less restricted or more liberalized regulation. Under the Automatic Route, the foreign investor or the Indian company does not require any approval from the Reserve Bank or Government of India for the investment.

Approval Route

Under the approval route or government route, the foreign investor or the Indian company should obtain prior approval of the Government of India agencies or bodies specified.

Now, On Aug. 28, the prime minister’s cabinet approved a slew of changes to the country’s foreign direct investment (FDI) norms as follows.

What does it mean to have 100% FDI?

In 100% FDI foreign companies own as much as 100% equity in the local respective sector through the government approval route in cases where it is likely to result in access to modern technology. In the absence of 100% FDI, foreign companies are required to form joint ventures with domestic firms if they wanted to establish a manufacturing base in India. With 100% FDI, they can independently plan and implement operations in India.

What are single brand and multi-brand retail businesses?

Single-brand retail refers to a business that sells goods to individual customers and not other businesses and such goods are all sold under the same brand. Nike, for example, sets up stores in India in which the foreign parent of Nike (Nike Inc.) invests. Such stores can only sell Nike products under the ‘single brand’ route.

Multi-brand retail are businesses that sell goods to individual customers and such goods can carry several different brands. Walmart is an example of multi-brand retail, which stocks and sells goods from various brands.

Who will benefit from it?

1) Single-brand retail

The government’s decision to permit foreign single brand retailers begin online sales ahead of opening physical stores will reduce their time for entering the Indian market and also lower the entry barriers for such brands, said retail experts.

As a result, brands are allowed to sell online before opening stores. It has, however, maintained that those applying under the single brand retail trading policy will also have to open a store within two years of starting online sales. The policy change is positive as it lowers entry barriers for retailers.

Online sales will lead to creation of jobs in logistics, digital payments, customer care, training and product skilling, he told reporters after the meeting of the Union Cabinet.

Clearly, retailers and shoppers worldwide are relying less on physical stores as the mainstay of shopping for goods. In India, which is a still a huge brick and mortar market, revised policies for foreign retailers are clearly pointing to that trend. By 2020, India’s e-commerce market is expected to touch $150 billion because of the presence of large retailers such as Amazon and Walmart-owned Flipkart. Earlier, brands could take up to a year to open a store from the time of applying for the single-brand retail FDI under the automatic route as they sought the right location, and shored up hiring.

30% local sourcing remains a mandatory condition for single-brand retail.

2) Contract manufacturing:

Companies like Apple have so far been reluctant to enter India.

For instance, Apple produces phones through its contract manufacturers Foxconn and Wistron in Taiwan. According to the existing policy, local sourcing by Foxconn won’t count towards the US tech giant’s sourcing obligations. This restricted the iPhone maker from setting up its manufacturing ecosystem in India, both for domestic sales and exports.

That bottleneck has now been cleared.

Similarly, various pharmaceuticals firms, which depend on contract manufacturers for drug production, will benefit from the new rule.

Export of goods from a foreign company’s factory in India will be accounted as local sourcing, irrespective of whether the goods procured are sold in India or exported.

Under the current policy, a foreign company needs to purchase at least 30% of the product locally. The rule has been a sore point for many companies including Apple.

Apple has been in talks with officials in India to enter the fastest-growing smartphone market in the world and tap a larger share as China stagnates. It has been a minor player in India, in part because of its high prices, but local manufacturing would help the Cupertino, California-based company avoid import duties of 20%.

3) Coal mining:

The energy sector is also hopeful about the FDI green signal. Coal mining in India is a monopoly of the state-owned Coal India. Private sector power producers last year witnessed a crisis due to a shortage of coal. Coal India had cut down the availability of the mineral to small private sector power producers and other non-priority customers. With 100% FDI under the automatic route, the sector may see the entry of new private players, leading to healthy competition.

For coal mining, so far 100% FDI under automatic route was only allowed for captive coal production. It has now been decided to permit 100% FDI for not just commercial coal mining but for associated processing infrastructure as well, including coal washery, crushing, coal handling, and separation.

4) Digital news media: Also, for the first time, the government has set an FDI cap at 26% for digital news media, which till now was not covered under any foreign investment rules. Digital media companies with more than 26% FDI will now be required to bring down their foreign equity level.

View full video here

The smooth inflow of FDI into various sectors is vital to stimulate the Indian economy and take its GDP to the targeted $5 trillion in five years.

Akshay Seth
Linkedin


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