NEW DELHI: The Narendra Modi-led government is mulling liberalising its Foreign Direct Investment (FDI) policy as part of a package to revive a faltering economy.
Besides tweaking FDI limits in aviation and insurance intermediation, the government will also come out with clarificatory notes that will clear up grey areas in the FDI policy such as explicit permission under the automatic route to contract to manufacture as well as relaxing the cap for FDI in single-brand retail allowed under the automatic route.
It is also planning to come out with a clarificatory note on Foreign Portfolio Investors (FPI) to ensure they do not come under the ambit of the super-rich tax. A super-rich surcharge was introduced in this year’s budget on individuals and groups of individuals who earned more than Rs 2 crore annually. The tax surcharge is also applicable to FPIs as they mostly function as trusts. In all, foreign investors took out $1.8 billion from Indian stock markets last month, after the announcement of the tax.
Officials said that a tweak in the definition of trusts was being considered as a way out of this logjam. This would be done by the income-tax department, while the FDI policy changes would be ushered in by the Department of Industrial Policy and Promotion.
Top officials of the Ministry of Industries said that while most manufacturing sectors were almost 100 per cent open to FDI and these manufacturers were allowed to retail their products in India, the “grey area was when a company had these products manufactured through a contractor and then tried to sell them in the market.”
A clarificatory note allowing 100 per cent FDI in contract manufacturing, as also its sale within India by the original brand owner, is being considered. Firms like Apple, which have contracted I-phone manufacturing to Foxconn Technology Group, will be benefitted by the move.
Another sector where the government is mulling relaxation in rules is single-brand retail where up to 49 per cent is allowed through the automatic route. Besides, officials said they were looking at proposals to allow local sourcing norms requirement to be met in 8-10 years, instead of five. "Single brand retail has been a top draw in FDI inflows and it makes sense to encourage this route. Multi-brand retail remains a political minefield and the government would probably avoid touching it at the current juncture," said Prof Biswajit Dhar of JNU.
The government will also look at increasing FDI limit in airlines, a move which was earlier bitterly resisted by many Indian airlines including the now-defunct Jet Airways. Officials said the government was planning to relax the cap of 49 per cent FDI under the automatic route for airlines.
Foreign insurers
The Central government is also looking at a move to relax the cap on insurance intermediation from the current 49 per cent. Most of the world’s largest insurance brokerages are currently absent from India and this is expected to help bring them in.