What was happening, not happening for the last three years has finally happened and the Narendra Modi Government announced its decision to allow 100 per cent Foreign Direct Investments (FDI) in single brand outlets. Going by the recent mood of the government, it was vivid that the new wave move in the direction of liberalisation would soon take a proper shape. Even worst critics of Modi and the BJP Government would agree that there is no other option before the government but to change the gear and put Indian economy on ‘Liberalisation Mode’ to maintain the pace of progress with the world. The national Flag carrier airline, Air India was the first to fall in line. The Union Government allowed 49 per cent private equity in the ‘sick’ Air India, thus, gave it a ray of hope to survive. Barely a week after a week, the Union Government came out with another shocker to allow 100 per cent equity in single brand stores. It means the Modi Government has lived up to its assurance to open its doors to the world. Prima facie, it seems to be a welcome move though it involves a lot of guts.
Modi and Union Finance Minister Arun Jaitley ushered a new wave of liberalisation in FDI regime on last Wednesday. In keeping with its overall approach, this round liberalised some investment norms and simplified procedures. Government deserves credit for its FDI policy approach which has been consistent. This, in turn, has led to a noticeable increase in FDI flows over the last three years, with 2016-17 recording a high of $60.08 billion. It is important for the government to keep at it, as FDI brings in scarce capital as well as advanced technology and management practices. Some aspects do stand out. By taking this decision, Modi has exhibited that he stands committed to a disinvestment process for Air India. Civil aviation in India is a sector where there is a fair degree of competition and growth over the last decade has been driven by private carriers. By not only staying the course on Air India’s disinvestment, but also bringing foreign investment rules in the airline on par with private carriers, NDA has underscored an important policy principle.
State dominates commercial activity
Unlike many liberal economies of developing nations, in India, State dominance in commercial activities has left the government with a direct stake in too many businesses. To enable the creation of a competitive market in these areas, it is important to have a policy and regulatory approach which does not discriminate on the basis of ownership. This principle that has been applied to Air India’s disinvestment process should be extended to other sectors. Separately, a change in FDI procedures also highlights weaknesses in India’s manufacturing ecosystem. The mandatory domestic sourcing norms have been diluted to encourage FDI. It is a reminder of inefficiencies that plague the manufacturing sector.
The true potential of FDI liberalisation can be harnessed only when Indian suppliers play a greater role. The current FDI package, thus, needs to be supplemented with measures which strengthen ‘Make in India’. In terms of job creation and transforming India’s economic landscape, this is the most important task that remains to be carried out. Its success will depend not just on Centre removing all the entry and operational barriers to manufacturing, but also getting states to create a more conducive atmosphere on the ground so that India can be competitive internationally. These steps will not only catalyse more FDI, but will also play a significant role in deepening India’s linkage to global supply chains. This combination will create a virtuous cycle, placing the economy on a high growth trajectory.
Having said all these paragraphs of high praises, I cannot resist recalling those days in the Indian Parliament when the same BJP had raised hue and cry on the then Manmohan Singh Government’s similar decision to allow FDI in brand markets. It was Sushma Swaraj in the Lok Sabha and Jaitley in the Rajya Sabha who let the attacks with lethal weapons of words and arguments, and almost put the government on floor. Similar situation was witnessed when the then Congress Government had tried to introduce the historic GST Bill. Similar efforts were undertaken by the Modi Government who saw their way through, though with a few changes.
Now that the Union Government has cleared the proposal to allow 100 per cent foreign equity in single-brand retails, it is bound to come with many effects on indigenous industry. For example, many Indian clothing manufacturers will have to take foreign brands head-on as they get fullest support in the form of licenses from the Indian Government. Will they be able to stand this steep competition? If yes, it would mean healthy and speedy growth of Indian economy. But if they fail, it would amount to be disaster for the Indian manufacturing industry. This would come sharp in contrast to the well-publicised slogan of ‘Make in India’ by none else but Modi himself.
Indian workers to benefit
Yes, if single brand manufacturers open their businesses in India, they will have to open their manufacturing units on Indian soil. In that case, Indian skilled and semi-skilled youth would get new employment opportunities. Moreover, if these investors start their exports, the Indian Government would be the direct beneficiary due to our tax structure. If this is the interpretation of Modi’s ‘Make in India’ slogan, he stands gain. But, it’s tricky.
The timing of Modi Government’s this revolutionary decision seems to be well calculated. The next Lok Sabha elections of 2019 are less than two years away. If this announcement really encourages FDI to arrive in India in the next six months, there would be atmosphere of cheer and joy. However, if foreign investors and manufacturers continue to maintain doubts, and if not, many investors come forward, Modi Government would fall flat on its face and, in turn, will face the music in 2019. In this context, let me recall, during the UPA-I regime, the then Civil Aviation Minister Praful Patel had put Air India on sale with a great fanfare. However it failed to lure any amicable airlines. Thus, the project had to be quickly wound up.
Will Modi Government’s new venture meet the same fate, or would it come out with flying colours? Let’s wait and watch for the next half a year.
The author is a political analyst and former Member of Parliament (RS).