FDI reforms: Sensible, even if incremental

The easing of foreign direct investment ( FDI) rules across 15 sectors — ranging from construction, single-brand retail and banking, to defence, broadcasting and airlines —is welcome.

Irrational rules must go as India needs inflow of capital that comes with technology and expertise. The fund-starved construction sector sees extensive liberalisation.

Removing minimum thresholds for floor area and capital investment could encourage small projects and reduce the risk of delays. Making entry and exit for foreign investors easier is also welcome.

However, removing the lock-in-period stipulation in a few sectors, special economic zones and investments by NRIs could lead to speculation. The RBI must be in the loop on shortterm capital inflows. In parallel, India also needs a robust policy to release land for urbanisation. Simpler rules in single-brand retail — removing the condition on mandatory local procurement for hi-tech companies and letting mass brands comply with the 30% local sourcing rule from the day their first store opens, not from when the first tranche of investment is made — will help retailers grow their operations.

However, concerns on arbitrariness in case-to-case approvals are not entirely misplaced. To prevent this, the sourcing rule should go for all retailers. Allowing single-brand retailers to undertake e-commerce activities is also in order. It is welcome to see the BJP in power shed the apprehensions the BJP in Opposition had about FDI in retail.

In the banking sector, full fungibility in FDI and FII makes it simpler for private banks to raise capital.
Making defence production FDI automatic is meaningless: defence procurement depends on government approval. Allowing 100% FDI in direct-to-home distribution of broadcast signals is welcome, but genuine liberalisation requires allowing interoperability of set-top boxes. Ideally, the government must allow unlimited overseas capital in all sectors save those on a short negative list. However, FDI is not a magic wand. To grow, India should also have the ability to make use of capital.