While foreign investors and companies find staying in China an increasingly unattractive arrangement, development-hungry New Delhi has taken a step toward FDI liberalization that may lure restless capital its way. The Guardian reports:
India has announced sweeping changes to rules on foreign direct investment, opening up its defence and civil aviation sectors to complete outside ownership and clearing the way for Apple to open stores in the country.
The reforms announced on Monday also loosen restrictions on investments in pharmaceuticals and retail.
Apple is expected to be a beneficiary of a three-year relaxation on local sourcing norms, with an extension of up to five years if it can be proven that products are “state of the art”.
Other single-brand retailers such as Ikea are also expected to benefit.
Defence contractors that have been reluctant to transfer technology to manufacture equipment in India would get the right to own local operations outright, up from 49% previously.
In other changes, India allowed 100% foreign direct investment (FDI) in civil aviation, following last week’s launch of a policy that lowered barriers to entry for airlines that want to fly international routes.
The government also allowed foreign companies to own up to 74% in brownfield pharmaceuticals projects without prior government approval. India already allows 100% ownership of greenfield pharma businesses.
It is a significant overhaul for a government which often creates a lot of friction when foreign companies try to do business. Not since the BJP suffered a heavy defeat in state elections last fall has the government announced such extensive reforms. Dogged by anxiety resulting from the ‘exit’ of the internationally-lauded RBI governor, falling manufacturing and investment, and rising commodity prices, Modi’s government may have felt extra pressure to do something despite protest from traditional allies.
However, it is too early to know if opening up more sectors or setting more liberal equity caps will have foreign investors queuing up to invest enough to get Modi out of troubled waters. Many of the recently opened industries such as aviation and defence have long return horizons; unless New Dehli can provide sufficient optimism for sustained reforms it will be difficult to attract capital.
Moreover, even if India is willing to reduce barriers to entry, a history of frequent regulatory and pricing interventions can deter investors. It’s hard to imagine there will be much FDI in pharmaceuticals, for instance, if price controls on drugs persist. Major problems like chronic corruption, crippling licensing bureaucracies, an untrained labor force and infrastructure shortcomings all remain unresolved.
Overall, however, there is no disputing that FDI liberalization is a step in the right direction. The hope is that this is just the beginning.