Economic reforms: FDI back in reckoning
While political parties and analysts were debating on the nuances of the government’s decision to rationalize LPG subsidy and hike in diesel price by Rs 5, they were taken aback by the reforms announced within the next 24 hours. Big Bang Friday (September 14, 2012), as it is being commonly referred to, opened the sluice gates to the much awaited reforms. Apart from disinvestment in public sector enterprises such as OIL India, HCL, NALCO, RITES and MMTC, which will help the government raise Rs.15,000 crores, the real reform was the announcement to go ahead with opening up of foreign direct investment (FDI) in retail, aviation, broadcasting services and power exchanges. However, the major opposition has been with specific reference to allowing FDI in retail – multi-brand 51 percent, and increasing the limit up to 100 percent (from 51 percent) in single brand. The decisions, amidst political opposition, are all important for the economy. This paves the way for the entry of foreign retail giants such as Walmart, Tesco, and Carrefour in the $450 billion retail market.
According to the conditions laid down by the government, at least 50 percent of total FDI brought in (in the case of multi-brand retail) shall be invested in ‘back-end infrastructure’ within 3 years of the induction of FDI. Back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, warehouse, agriculture market produce infrastructure, etc. Given the focus on investment in back-end infrastructure, farmers stand to benefit from the significant reduction in post-harvest losses. Small manufacturers will benefit from the conditionality requiring at least 30 percent procurement from Indian small industries, as this would enable them to get integrated with global retail chains. As a measure to keep the opposition at bay, the revised policy has it that it would be the prerogative of the State Governments to decide whether and where a multi-brand retailer, with FDI, is permitted to establish its sales outlets within the state. With specific reference to aviation, allowing foreign players to buy up to 49 percent stake in Indian airlines could probably help ailing Kingfisher and other smaller players.
For a government that has been beleaguered for policy paralysis, the decisions with respect to FDI and disinvestment will send positive signals to investors across the globe.