Pre-Diwali reforms cannot be a one-off
The debt-ridden construction industry has reason to cheer the changes in rules the day before Diwali since it will be easier to bring in FDI—the restrictions on the minimum size of the project have been done away with and exits have also been made easier. Similarly, private banks will welcome the increase in FII limits to 74%; firms like Ikea will be happy with the relaxation in sourcing norms and several relaxations have been made for foreign investment in the defence sector. For genuine cheer, however, the reforms have to be seen as a continuing process—this is what finance minister Arun Jaitley said they were—and not just a one-off. Many of Tuesday’s reforms look like one-offs, apart from the fact that there can be no real reform unless it helps Indian investors since they comprise the bulk of investment in any year—as we have reported today, the finance ministry has turned down the oil ministry’s proposal to free up gas prices, vital for firms like ONGC and Reliance to invest in the sector.
It is unclear why, for instance, the banking sector was kept out when a composite FDI/FII cap was introduced in July—it took four months to fix what should have been done in the first instance. Similarly, while the 30% local sourcing rule for single-brand retail is itself a bad idea, this is to be relaxed for single-brand entities—like Apple?—that are considered ‘state-of-art’ or in ‘cutting-edge technology’. Given the amounts will be subject to negotiation, as well as subjectivity over whether a firm is state-of-art or cutting-edge, this is unnecessary discretion being brought in again. The procedural changes for single-brand retailers to sell through omni-channels is welcome, but the real issue for investors today is multi-brand retail (which is technically still allowed) and whether FDI is to be allowed in e-commerce firms like Amazon and Flipkart which have found a roundabout way to sell to consumers though the law prohibits B2C e-commerce.
Allowing up to 49% FII/FDI in defence through the automatic route is a big thing, and eliminating clearances by the Cabinet Committee on Security for higher FDI levels is welcome—this will now be done by the FIPB. But the critical thing here is to clear projects which investors can invest in. Despite several lakh crore of ‘clearances’ to projects over the last 18 months, there are few that are actually ready for investment; clearances by the Defence Acquisition Council, Ajai Shukla points out in Business Standard, relate to procedural milestones like ‘acceptance of necessity’—the actual orders can take several years more. The irony of prime minister Modi being in the UK to drum up investment without any resolution of the retrospective tax cases on Vodafone and Cairn—both UK-based firms—of course, is not lost on anyone.