By Invitation: Don’t count the greenbacks just yet

The evening of November 10 saw heightened activity across New Delhi. Two events occurred within hours of one another. One was entirely political and extremely newsy - the BJP elders castigating the current leadership for the Bihar poll debacle in an open stinging letter. The other was entirely economic and far less engaging — the government announcing FDI reform across 15 sectors. The economic event grabbed as much attention as the inherently more juicier political event.

The reforms are termed as Diwali bonanza for foreign investment. But are they likely to have a big-bang impact on FDI?

The announcement, no doubt, has some big positives. One, the regime around the cash-strapped real estate and construction sector has been considerably liberalised. In a smart move, and carrying forward the liberalisation from last year’s announcement, all major restrictions (in terms of minimum area, capitalisation periods) have been removed. The ability to monetise work-in-process projects and to attract FDI in fully developed sites are two other significant relaxations.

The underlying idea seems to be that if markets are willing to fund real estate, barring absolutely out-and-out speculative investments, the government does not want to stand in the way of equity financing. This is expected to correct the equity-debt imbalance that has created extreme stress, thereby even perhaps, providing some succour to banks and other lenders.

Two, the Indian media sector has received a major stimulus with the government increasing foreign investment limits in several segments and completely removing entry barriers in others. On the content side, foreign investment limits in news and current affairs segment broadcasting and radio have been increased to 49 per cent. The print sector has been left at 26 per cent, though, while no clear norms have been specified for the non-print, non-television, pure “web only” players.

On the carriage side, limits for cable and DTH have been done away with. This could trigger significant M&A activity, given the capital requirements for phases 3 and 4 of digitisation. DEN, Hathway and other similar stocks showed some impact of this announcement in Diwali trading. Three, some clean-up work has been done. The anamoly on the applicability of fungibility to banks is now set right. This is expected to trigger further foreign investments in bank stocks. Defence investments up to 49 per cent have been made automatic. NRI investments on non-repatriable basis have been classified as domestic, not requiring FIPB intervention. Threshold limits for FIPB have been enhanced and other simplification measures announced. However, changes proposed in the retail sector are almost entirely marginal. It was logical to permit companies having single-brand retail approval to also sell online. That has been done. Sourcing conditions have been relaxed to some degree. Manufacturers have been provided some leeway on outside sourcing for retail operations.

These changes, while being positive, are not fundamentally game changing. Two big issues — propelling modern trade while balancing the Indian retail entrepreneur and handling the e-commerce model — have been entirely skirted. These are pertinent now, given judicial intervention is beginning to happen in the e-commerce policy framework and close to $10 billion of FDI is already deployed.

Key reform for some of the building block sectors, such as education, where some government thinking has been done in the past, continues to be “hope in process”. Innovative financing models on the infrastructure and financial markets side continue to be awaited.

Net-net, this FDI reform is certainly significant and a big positive step. As it indicates the government’s continuing inclination to respond to investors. This announcement creates an environment of change which, coupled with the people’s clear mandate, sets the stage for this government to deliver more. That includes basic structural reform as well as more direct handling of tough nagging issues. And delivering these will then lead to meaningful inflow of foreign capital.

The writer is Partner, BMR Advisors. With assistance from Lokesh Malik, Director, BMR Advisors

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