Baby steps

The Centre’s decision to further liberalise foreign investments by moving to a composite cap in most sectors is a welcome reform, inasmuch as it simplifies the policy and opens up more sectors to overseas investments. Further, by allowing up to 49 per cent investment (or the sectoral cap, whichever is lower) by foreign institutional investors, qualified foreign investors and sub-accounts through the automatic approval route in most sectors except banking and defence, it has given potential overseas investors an easier means of entry, as well as clearer view of available options. Significantly, the Cabinet has included portfolio investments in multi-brand retail as well in the overall easing of FPI caps. Since the 49 per cent composite cap also includes foreign direct investment (FDI), this opens the door for foreign big box retailers to invest in India’s high potential, but currently highly stressed organised retail sector. This should come as some relief to Indian-owned big box retailers, who have been battling high costs and severe competition from online retailers. In fact, the Retailers’ Association of India, which represents Indian organised retailers, had even approached the courts, seeking a level playing field with e-retailers on the foreign investment front, which the court had suggested the government could consider. Currently, although the sectoral cap on FDI in multi-brand retail is pegged at 51 per cent, there are so many strings attached that the policy is practically unworkable, and the limit has remained on paper. Now, by bringing multi-brand retail under the composite cap, and removing the prior approval requirement, it will allow serious players an opportunity to test the market through the portfolio investment route. It will also allow promoters of Indian organised retail chains the opportunity to deleverage by unlocking some value through strategic stake sales.

That said, it is disappointing that despite the Prime Minister’s ‘Make in India’ push — which logically includes foreign investment in order to do so — actual policy reform has remained incremental, and limited to tweaking sectoral caps. Investors — whether Indian or foreign — are driven by the return on their investments, and not by the bureaucratic difficulty (or ease) of investment in a particular sector. If the return is attractive enough, the investment will come. If it is not, it won’t, regardless of caps or approvals. This is why, despite the record $28.8 billion inflows of FDI in 2014-15, India’s share of global FDI flows is just 3 per cent, and just over a third what tiny Singapore received the same year.

With a population of over 1.2 billion, and an economy growing at the fastest clip in the world, India should be at the forefront as an FDI destination. That it is not is primarily due to red tape, and micro-management by sectoral regulators. Retail offers a prime example of this, where lack of barriers has allowed e-retailers to raise billions of dollars in investments. Incremental reforms, and reforms by stealth, may have worked in the initial years, but low-hanging fruits which could be plucked as a result are long gone. It is time for bolder action.

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