5th Anniversary Issue
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TOP Five
After constant accusations of policy paralysis, the Government of India, in 2012, undertook major FDI reforms. These include opening of Multi-Brand Retail up to 51 per cent FDI, raising FDI in single brand to 100 per cent from 51 per cent, allowing foreign airlines to hold up to 49 per cent stake in domestic airlines, bringing clarity to FDI in power trading exchanges by allowing 49 per cent foreign investments and opening up broadcasting industry to 74 per cent. The data released from the Department of Industrial Policy and Promotion (Figure 1) showed that India received 38 per cent less inflows into the country in 2012-13 as compared to the previous year. And these reforms were targeted to improve this situation. The big bang of reforms formed a part of a package of measures that are aimed at reviving the growth of the country and staving off a ratings downgrade. Looking at the positives of the reforms, these steps will help strengthen the growth process and generate employment in difficult times. The retail reforms will now allow the global firms such as Wal-Mart to hold a majority stake in the business and sell directly to the consumers. This is a major step aimed at transforming India’s $450 billion retail market and tame inflation. Previously, foreign firms were allowed to operate only as wholesale outlets. The foreign players will streamline the procurement process by removing the middlemen, offering better prices to the farmers, pumping investment into cold storage facilities and preventing the produce from rotting. But the reforms come with stiff riders. The foreign retailers are allowed to setup in cities with a population of more than one million and must source at least 30 per cent of goods from the local industries. State governments will have the freedom to decide whether to allow the supermarket and the minimum investment will be $100 million, with half
of that in rural areas. The aviation reforms will now provide a much needed lifeline to the India’s debt-laden airlines. Denial of access to foreign capital could have resulted in the collapse of a number of country’s domestic airlines, hence creating a risk for financial institutions. This would have led to a huge gap in the country’s infrastructure. The reforms in broadcasting will help boost the on-going digitization process. This will help
Fig 1: FDI Inflows in India
consolidation in the sector and allow companies to invest in cutting-edge products and services for the consumer. It will also allow cable companies to start investing aggressively in broadband infrastructure services and help evolve a healthier ecosystem for all the stakeholders. The power sector reforms will help bridge the huge gap between the demand and supply in the Indian market. The power exchanges can now raise funds and bring in the advanced technology. This move is aimed at strengthening the power exchanges, enhancing the availability of power, improving distribution and introducing global best practices in India. While all these reforms definitely look attractive for the growth and revival of the Indian economy, much will still depend on how well they are implemented. A concerted effort from both the Central and State governments will be imperative to reap the actual benefits of the reforms.
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
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