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Abolishing FIPB sign of India’s open market PDF Print E-mail
Monday, 29 May 2017 04:08
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Would be even better if India modified restriction in aviation and retail, and relaxed local-sourcing rules

 

Nothing symbolises how far, and fast, India has moved in terms of opening its markets than last week’s abolition of the Foreign Investment Promotion Board (FIPB). Set up as part of the 1991 economic reforms, the FIPB was a high-level inter-ministerial group that cleared foreign investment proposals in the country at a time when most investment avenues were off bounds. At a time when bringing in foreign investment also meant a plethora of clearances from various ministries, the FIPB served as a one-window clearance—and no matter which ministry it was housed in, the prime minister’s office was always keeping a watch on it.

Over a period of time, as the economy grew stronger and corporate India became more competitive, various restrictions on foreign investment started getting relaxed. Indeed, relaxing of FDI restrictions went almost hand in hand with the lowering of import duties since both symbolised the ability of Indian firms to take on global competition. In the initial years, for instance, India restricted how much foreign investment was allowed in the telecom sector; later, however, even 100% FDI was allowed. Till even a few years ago, while foreign pharmaceuticals firms were allowed to set up new plants in India—greenfield, in jargon—they were not allowed to take over Indian firms; indeed, at one time, the fear was foreigners would buy out Indian firms and that this would raise medicine prices and reduce availability. In reality, nothing of the sort happened and, last year, the government allowed foreigners to buy up to 74% of an Indian pharma firm’s equity without needing any approvals. As a result, as finance minister Arun Jaitley said after the Cabinet cleared FIPB’s abolition, over 90% of India’s FDI already comes under the automatic route. With FIPB gone, line ministries will clear non-automatic FDI proposals using rules that are to be notified and, presumably, the government will keep a watch over proposals that remain stuck for whatever reason.

That said, the Elon Musk statement about India’s local-sourcing rules has important lessons. Musk was wrong, India does not have local-sourcing rules for automobiles, but it does have them for single-brand retail where firms like Apple and Ikea wanted to enter—that’s how the Tesla chief got confused. But why have such rules anyway? Apart from furthering misconceptions about India, they serve little purpose apart from protecting inefficient local firms—in any case, once the local supplier-base develops, an Ikea or an Apple will source from Indian firms. Nor is it clear why, FDI should not be allowed in the newspaper space or why foreign airlines should be allowed to buy only 49% of Indian airlines when the law allows non-airline firms to buy 100% of a local airline’s equity—this protects a few Indian firms, but surely that cannot be the objective of policy-making? And, it is sophistry to not allow FDI in the B2C e-tailing sector but to allow it into the B2B marketplace model since it is clear existing e-tailers are exploiting loopholes in the law and selling in the B2C segment. Over a period of time, it is likely these restrictions too will get relaxed or entirely disappear. The sooner this is done, the better, since that will make India one of the world’s most open markets.

 

 

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