FDI reforms give embattled economy a shot in the arm

Government data show that economic growth has slipped to 5% for the April-June 2019 quarter, a six-year low. With stock markets tumbling and automobile manufacturers grumbling, the government has gone on a reform spree. It has, by way of Press Note No. 4 of 2019, liberalized foreign direct investment (FDI) policy in coal mining, contract manufacturing, single brand retail trading (SBRT) and digital media. This article analyzes the key points of such liberalization and their impact on the economy.

SBRT norms

While FDI up to 100% under the automatic route was previously permitted, single brand retailers with FDI in excess of 51% were required to procure 30% of the value of goods domestically. Despite past liberalizations, the sector has not achieved the desired traction, as local sourcing (LS) has remained an issue for international retailers, especially for those in tech-heavy sectors. They have struggled to meet these conditions because domestic suppliers have been unable to meet demand. With the changes in LS, these strict conditions have been done away with.

The government now allows SBRT entities to meet LS by procuring goods domestically for export and local operations, thus giving substantial impetus to exports. Previously, LS only included goods procured for local operations and exports to the extent they exceeded past procurement after an entity had set up a presence locally. That was for an initial period of only five years. An SBRT entity can now also procure from third parties, with the government recognizing commercial arrangements such as those that exist between Apple and Foxconn.

SBRT entities may also now undertake online retail operations immediately without first having to open physical stores, provided that they open physical stores within two years. The previous restrictions had affected retailers such as Ikea and Apple.

Vaibhav Kakkar is a partner and Sahil Arora is a senior associate at L&L Partners. The views of the authors are personal.