Govt tweaks FDI norms to open single brand retail, aviation sector further

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Just days ahead of the World Economic Forum in Davos, where Prime Minister Narendra Modi is likely to showcase India’s potential before global chief executive officers and political leaders, the Union Cabinet has relaxed rules for attracting foreign investments across sectors such as aviation, retail, and construction. This is the fourth time in the past three years that the government is tweaking the foreign direct investment (FDI) rulebook. 

In a significant step, the Cabinet on Wednesday permitted FDI in state-owned carrier Air India, which is up for disinvestment. Foreign airlines or any other foreign investor can now put in up to 49 per cent in Air India, thereby making it easier for the government to divest its holding in the airline. The government is expected to invite expression of interest for Air India after the Union Budget, though a parliamentary committee has recommended that disinvestment of the airline be put on hold for at least five years.

“No major Indian corporation from outside of aviation will invest in such a complex project without an experienced strategic partner. Allowing foreign airlines to participate will increase the number of interested bidders and the valuation,” aviation consultancy firm CAPA said.

The Cabinet has also made it simpler for international single-brand retail companies keen to set up business in India. While 100 per cent FDI was allowed way back in 2011 in single-brand retail, from now on they can enter India through the automatic route rather than going through various administrative ministries. 

Sweden-based furnishing major Ikea has, so far, been the largest foreign investor (with 100 per cent FDI) in single-brand retail, committing Rs 105 billion to set up multiple stores in India. Among other prominent international single-brand retailers, H&M entered India with 100 per cent FDI, while Zara and Marks & Spencer came through the joint venture route. While Apple has been waiting to set up stores in the country, local sourcing norms have been a hurdle for the Cupertino-based iPhone maker. The 30 per cent mandatory sourcing norms have been somewhat relaxed now. 

Companies sourcing goods from India for its global operations during the initial five years will also be counted as part of the mandatory 30 per cent sourcing. Earlier, sourcing for global operations was not counted as part of the mandatory 30 per cent sourcing for a foreign retailer. While this may help some international firms, Apple, which is a specialised tech firm, is unlikely to benefit from this move, analysts said. 

“We don’t expect this to generate sudden interest from Apple since for hardware manufacturing, the components are mostly still not produced in the country,” a senior official from the commerce ministry said. 

Till now, automatic approval for FDI in single-brand retail was given only up to 49 per cent of the paid-up capital, beyond which government permission was required. The latest tweak is expected to woo many other foreign brands into India’s promising retail space, estimated at around Rs 38.23 trillion. However, FDI in multi-brand retail, with chains such as Walmart, Tesco, and Carrefour looking for big play in the country, is still being opposed by the current National Democratic Alliance government even as on paper 51 per cent FDI is allowed. 

With many international brands not used to waiting for regulatory approvals in developed markets, FDI sentiments for India may considerably brighten, experts said.

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