AS GROWTH SLOWS, FDIs TO THE RESCUE, AGAIN!

about 22 days ago
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The Govt is indeed taking the slowdown seriously!

After the roll backs on Friday and RBI surplus transfer, there was another shot in the arm yesterday late evening. The Govt’s favourite go-to to boost the economy, Foreign Direct Investment (FDI) got further liberalized.

It allowed:

  • 100% FDI under automatic route in coal mining, sale of coal and associated infra such as coal washery, crushing, coal handling, and separation
  • 100% FDI in contract manufacturing, also under automatic route
  • 26% FDI in digital media
  • Eased sourcing norms for single-brand retailers
  • Online retailing under single-brand retail by relaxing rule of mandatory brick-and-mortar store

The first thought which comes to our mind – Apple will be running happy all the way to the bank! And Tesla could now find India to be an attractive hub.

For the past four years, Apple has been lobbying with the Govt to relax the “sourcing” norms and looks like it has worked. Till now the rule for single brand retail in FDI of more than 51% was that the company had to source 30% of its raw material from India. This was the big bone of contention – now the rule is that all raw material sourcing made from India by the company will be tallied towards local sourcing, irrespective of whether the goods procured are sold in India or exported.

Precisely two years ago, 28th Aug 2017, same day as yesterday, a new FDI policy was announced wherein it was ruled that companies like Apple will not have to source 30% locally for up to three years from the opening of the first store for all those selling products having state-of-the-art and cutting technology, and also where local sourcing policy is not possible.  That, apparently was not enough.

This FDI change in single brand retailing and 100% FDI in contract manufacturing is really a game changer. Till date FDI was allowed in manufacturing but there was a gaping hole in contract manufacturing.  Thus what we could now see is that the likes of IKEA, Apple and so many other foreign brands will do business in India as they can now get the products contract manufactured in India.

The Govt also gave the digital media its due recognition; in fact the easing of FDI norms in digital media means the Govt views this as a separate platform and it was indeed about time it did that. Analysts say that this will unlock value for many digital companies like ZEE5, Voot, which operate within the umbrella of the bigger media company. Such companies, telecasting/making digital content will now be able to carve out a separate entity of their own and some might even consider going public! On the other hand, there is another school of thought which says that because digital media was under the bigger media company umbrella, FDI was not restricted to just 26% but now it will.

And the 100% FDI in coal mining should send shivers down the spine of Coal India and give it a jolt from its arrogant, monopolistic slumber. This is expected to finally put an end to Coal India’s monopoly and we could see a more efficient energy sector getting generated.

All in all, these are great moves by the Govt and will make India an attractive manufacturing destination, especially in the background of the ongoing China-USA tariff war.  That apart, these relaxations are all potential employment generators and that, we fell, is the biggest takeaway from this new round of stimulus.

With somber GDP numbers expected on Friday, these FDI norms could not have come at a more opportune time – before the GDP proclaims the slowdown, the Govt has affirmed the slowdown and taken some steps to correct the situation.  For this to percolate into growth, it will take some time, after all, the tastiest biryani is the one which is slow cooked.

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