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FDI POLICY REFORM: ALL YOU NEED TO KNOW

Written by Talent KAS

Related Topics: Foreign Investment, Ease of Doing Business

News

  • Union Cabinet chaired by the Prime Minister has approved the proposal for Review of Foreign Direct Investment (FDI) on various sectors.
  • The reform includes easing rules for overseas single-brand stores and permitting FDI through the automatic route in contract manufacturing and all areas of coal mining.

Reform at a glance

[Image Courtesy: Livemint]

Key Highlights

A. Coal Mining

  • As per the present FDI policy, 100% FDI under automatic route is allowed for coal & lignite mining for captive consumption by power projects, iron & steel and cement units and other eligible activities permitted under and subject to applicable laws and regulations.
  • Present policy also permits 100% FDI under automatic route for setting up coal processing plants like washeries subject to certain conditions.
  • Now, it has been decided to permit 100% FDI under automatic route for sale of coal, for coal mining activities including associated processing infrastructure.

B. Contract Manufacturing

  • Present FDI policy provides for 100% FDI under automatic route in manufacturing sector.
  • There is no specific provision for Contract Manufacturing in the Policy.
  • In order to provide clarity on contract manufacturing, it has been decided to allow 100% FDI under automatic route in contract manufacturing.
  • The reform will allow large foreign electronics and pharmaceutical companies to directly invest in local or foreign contract manufacturers.

C. Single Brand Retail Trading (SBRT)

  • Present FDI Policy provides that 30% of value of goods has to be procured from India if SBRT entity has FDI more than 51%.
  • It has been decided that all procurements made from India by the SBRT entity for that single brand shall be counted towards local sourcing, irrespective of whether the goods procured are sold in India or exported.
  • The current cap of considering exports for 5 years only is proposed to be removed, to give an impetus to exports.
  • Present policy provides that only that part of the global sourcing shall be counted towards local sourcing requirement which is over and above the previous year’s value.
  • It has been now decided that entire sourcing from India for global operations shall be considered towards local sourcing requirement. (not incremental value)
  • Present policy requires that SBRT entities have to operate through brick and mortar stores before starting retail trading of that brand through e-commerce.
  • This creates an artificial restriction and is out of sync with current market practices.
  • It has been decided that retail trading through online trade can also be undertaken prior to opening of brick and mortar stores, subject to the condition that the entity opens brick and mortar stores within 2 years from date of start of online retail.

D. Digital Media

  • Existing FDI policy provides for 49% FDI under approval route in Up-linking of ‘News &Current Affairs’ TV Channels.
  • It has been decided to permit 26% FDI under government route for uploading/ streaming of News & Current Affairs through Digital Media, on the lines of print media.

Major Impact and Benefits

  • Reforms in coal sector will attract international players to create an efficient and competitive coal market.
  • FDI now being permitted under automatic route in contract manufacturing will be a big boost to Manufacturing sector in India.
  • It will allow large foreign electronics and pharmaceutical companies to directly invest in local or foreign contract manufacturers.
  • Easing local sourcing norms for FDI in Single Brand Retail Trading (SBRT) will lead to greater flexibility and ease of operations for SBRT entities, besides creating a level playing field for companies with higher exports in a base year.
  • Permitting online sales prior to opening of brick and mortar stores brings policy in sync with current market practices.
  • Online sales will also lead to creation of jobs in logistics, digital payments, customer care, training and product skilling.
  • The reforms are meant to liberalize and simplify the FDI policy to provide ease of doing business in the country, leading to larger FDI inflows and thereby contributing to growth of investment, income and employment.

Background

  • FDI is a major driver of economic growth and a source of non-debt finance for the economic development of the country.
  • FDI policy provisions have been progressively liberalized across various sectors in recent years to make India an attractive investment destination.
  • As per UNCTAD’s World Investment Report 2019, global foreign direct investment (FDI) flows slid by 13% in 2018, to US $1.3 trillion from US $1.5 trillion.
  • Despite the dim global picture, India continues to remain a preferred and attractive destination for global FDI flows.
  • In Union Budget 2019-20, Finance Minister proposed to further consolidate the gains under FDI in order to make India a more attractive FDI destination.

Practice Question

“Liberalizing the FDI policy will enhance the ease of doing business in the country, thereby contributing to growth of investment, income and employment. Explain”

[Sources: PIB, Livemint, Investopedia]

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Talent KAS

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