Big Reforms on FDI Industries Have Enough Reasons To Cheer

The roaring mandate invests Prime Minister Narendra Modi with enough political capital to push ahead with “reforms”. The catch: what Modi means by “reforms” does not fall into the bracket of the usual definition that refers to deregulation, removal of distortions caused by regulation and minimise the presence of the government in business operations. Modi’s brand of “radical reforms” would include a cocktail of pro-poor programmes, a possible crackdown on tax dodgers and further curbs to discourage cash-based transactions now that the demonetisation demon has been laid to political rest.

Many had expected that the rage over the acute scarcity of cash over the past four months would boil over during the Assembly elections in Uttar Pradesh. It didn’t. Modi had sold demonetisation as a “pro-poor” measure that left the rich sleepless. The Modi government has already put on ice the conventional notion of “Big Bang” reforms. Two years ago, the economic survey had cautioned against unrealistic expectations of “Big Bang” reforms because of the absence of that impelling driver – a crisis. Instead, it argued in favour of a “persistent, creative and encompassing instrumentalism” – arguing in favour of small steps towards a larger, not completely defined, goal.

Officials and economists are agreed that going ahead with the toughest reform – labour laws – will continue to take a back seat. “We don’t see any party as yet taking up the really big reform step – labour reforms. This is the hard reality that all professional economists and bureaucrats recognise,” said Biswajit Dhar of JNU and a director on the Exim Bank board. Similarly, they do not expect any radical, strategic sales of PSUs. “A few sick, nearly sick or insignificant PSUs would be sold off to mark this government’s intention and to send a message across to the market,” Dhar added.

“Most of the big-ticket reforms are done. What the government can focus on are incremental reforms and any win gives space for such moves,” agreed economist Pronab Sen, former chairman of the National Statistical Commission. There will be a push to raise the taxpayer base in the country. At present, India has just seven taxpayers per 100 voters, ranking the country at 13th among 18 of its G20 peers that have some form of a democratic process.

FDI

India is set to make further changes in its overseas investment regime, scrapping the need for approvals in sectors where licences are also required, such as defence, telecom and broadcasting, eliminating one layer completely from the process.  “Clearance for FDI (foreign direct investment) separately after securing a licence adds another layer of approval from same authorities,” said a senior government official. He added, “Anyone who has gone through one level of scrutiny for licence from the authorities concerned should not need to go through the same checks again.”

Conditions related to FDI can be examined by the licensing authority, the person said. A big-ticket defence order expected to be floated soon should make quick progress once these changes are effected. Under current rules, investors have to apply for licences in many sectors besides clearances from multiple ministries, including security from home affairs. After securing licences, they are required to apply for approval of foreign investment, if any, which again goes through an inter-ministerial clearance process.

Defence investment, for instance, is subject to industrial licensing under the Industries (Development & Regulation) Act, 1951. The licence is given by Department of Industrial Policy and Promotion in consultation with the ministries of defence, external affairs and home, a process that takes time. “Why should there be a need for another level of clearance from same authorities?” said the official cited above.  Up to 100% FDI is allowed in defence on a case-to-case basis. India is the world’s biggest importer of defence goods, accounting for 13% of global purchases during 2012-16. The government is looking to give a push to domestic manufacturing of defence equipment to reduce imports and also create more local jobs. Since 2000, the defence sector has attracted just over $5 million in FDI.

In the case of telecom too, 100% FDI is allowed but subject to licensing by the Department of Telecommunications. Similarly, broadcasting is subject to rules and conditions framed by the ministry of information and broadcasting. Telecom has been among the biggest recipients of FDI with $24 billion in inflows since 2000, 7.4% of the total. The government has already announced its intent to scrap the Foreign Investment Promotion Board (FIPB) and leave FDI clearance to the relevant ministries or departments in sectors where government approval is needed. The official cited above said removing the additional clearance could be taken up at the same time.

“Abolition of FIPB will be truly be impactful if government approval is done away with in FDI policy across sectors,” said Akash Gupt, partner, PwC.  Again he added,  “If a licensor would grant FDI approval under licensing requirement but RBI would eventually be monitoring the compliance of same under FEMA (Foreign Exchange Management Act), it would need some consistency and connecting of dots.” A transition framework for replacing the FIPB process should be in place before the end of the financial year. The departments of industrial policy and promotion and economic affairs have begun consultations on the process. Keen to attract foreign funds in the country, the government has put a number of sectors on the automatic route.

GST

The big “reform” that looms is the goods and services tax (GST), which is on course for implementation by July 1. GST is important because it will enable the Modi government to level the field between imported items and those that are produced at home without running foul of its international trade obligations under the World Trade Organisation (WTO) and the stack of Free Trade Agreements (FTAs) that the country has signed over the years.

Indian tax policy has always been loaded against local manufacture. The cascade of central and state levies on domestic goods has never been fully neutralised by the countervailing duties imposed on imports. GST will ensure that India will be able to promote domestic manufacture without becoming protectionist since the tax “will automatically be levied on imports to ensure neutrality of incentives”, the Economic Survey of 2014-15 had noted.

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