By Samir Kumar on 01 July, 2016

What does the Indian Foreign Direct Investment Reform Mean for US Companies?

By Samir Kumar
Associate, South Asia

Modi's "Make in India" is Making Strides

The Indian government frequently sends contradictory signals to foreign investors with its policy decisions, but its recent decision to open up a host of sectors to 100% Foreign Direct Investment (FDI) was a very positive sign. Prime Minister Narendra Modi has been vocal about his desire to see India attract cash from around the world and build up its manufacturing base, while also becoming a hub for the digital economy. Yet investors have seen his government struggle to pass legislation to allow for structural overhauls in labor and land acquisition, so the all-too-familiar red tape persists. Moreover, the popular central bank governor Raghuram Rajan, under whom an inflation targeting mechanism was created, seems to have been forced out, spooking analysts and investors alike.

However amid all this gloom, the Ministry of Commerce’s Department of Industrial Policy and Promotion announced on June 20 that all barriers to investment in “modern technology”, in defense, civil aviation, broadcasting, as well as major caps to investment in agricultural trade and pharmaceuticals will be lifted. With the majority of these sectors to allow automatic clearance of Foreign Direct Investment. This is the largest measure to ease FDI restrictions undertaken since Modi took office two years ago, although a cluster of easing measures took place in November. A specific highlight is on local sourcing requirements for single-brand retail, not surprisingly coming soon after Apple announced its formal entry into the Indian market.

What About US Companies?

For US companies, this is unlikely to have an immediate impact, but these are promising hints at what lies ahead. While India and the United States have moved toward a close bilateral defense relationship, the defense reform remains couched in the ambiguous term, “modern technology.” To date, there were exceptions made for foreign investment in “state-of-the-art” technology, a term whose vagueness engendered as much confidence as one can imagine. Not much is likely to change under the new wording, save for deals already in the works in back rooms in Delhi. Some analysts eye the easing of clearance in single-brand retail and agricultural product and service FDI as the most promising. Richard Rossow of the Center for Strategic and International Studies says, “If a foreign company comes in and sets up a national grocery chain in India, it could be pretty significant in creating a huge number of low-skilled jobs.”

Modi is doing everything he can to make sure India stays on the path toward increased economic growth, founded on increased manufacturing and job growth. Aghast at his country’s ranking in the World Bank’s Ease of Doing Business index, he has named and shamed his states, who hold a great deal of control over business regulation, into taking action. This “competitive federalism” encourages a contagion effect among states toward greater ease of doing business.

While this latest measure will not have an immediate effect on the ground for US companies, measures such as this are important to show that the Modi government is serious about keeping India as an exciting destination for trade and investment. While there is a large constituency within India that is culturally opposed to foreign investment – and a discourse of economic self-sufficiency. Each move to open further in trade and investment shows that India is growing stronger at overcoming this discourse to the benefit of its markets.

Topics: GetGlobal, make in india, Narendra Modi, retail

Share this:

Recent Articles