By Sameer Pushp
With progressive liberalisation of the Indian economy, initiated in July 1991, there has been a consistent shift in the role and functions of the Department of Industrial Policy & Promotions (DIPP). From regulation and administration of the industrial sector, the role of the Department has been transformed into facilitating investment and technology flows and monitoring industrial development in the liberalised environment.
Evolution of Policy
The Government of India embarked upon major economic reforms since mid-1991 with a view to integrate with the world economy, and to emerge as a significant player in the globalization process. As part of this process, the FDI policy was liberalized progressively, through review on an ongoing basis and allowing FDI in more industries under the automatic route. In the year 2000, Government allowed FDI up to 100% on the automatic route for most activities and a small negative list was notified where either the automatic route was not available or there were limits on FDI. Since then, the policy has been gradually simplified and rationalized and more sectors opened up for foreign investment.
In February 2009, a new paradigm was introduced under the FDI policy, by incorporating, for the first time, the twin concepts of ‘ownership’ and ‘control’, as a central principle in India’s FDI regime, were recognized for calculation of direct and indirect foreign investment. This ensured application of simple, homogenous and uniform norms for as also to clarify the need for obtaining government/FIPB approval (or otherwise) for foreign investment into Indian companies and for such Indian companies in the eventuality of their making downstream investments.
* Government liberalised the induction of FDI in Micro and Small Enterprises by clarifying that FDI in MSE was now permitted, subject only to the sectoral equity caps, entry routes and other relevant sectoral regulations.
* All payments for royalty, lumpsum fee for transfer of technology and use of trademarks/ brand names, were brought under the automatic route, without the need for Government approval.
* In 2010, Government announced that recommendations of FIPB, only proposals with a total foreign equity inflow of more than Rs. 1200 crore, would henceforth be placed for consideration of CCEA, as against the earlier limit of cases with a total investment of Rs. 600 crore. It also exempted a number of other categories of cases from the requirement of obtaining prior approval of Government.
* The most recent and major exercise undertaken by Government has been the consolidation/integration of all existing regulations on FDI, contained in FEMA, RBI circulars, various Press Notes etc., into one consolidated document, so as to reflect the current regulatory framework.
Such consolidation is intended to ensure that all information on FDI policy is available at one place, which is expected to lead to simplification of the policy, greater clarity and understanding of foreign investment rules among foreign investors and sectoral regulators, as also to bring in greater predictability of policy. The final document in this regard was released on 31 March, 2010, as Circular 1 of 2010. It has further been decided that the consolidated circular would be issued every six months to ensure that FDI policy is kept updated.
Accordingly, the second edition of the Circular (Circular 2 of 2010) has also been released, effective from 1 October, 2010. This edition has clarified a number of aspects of FDI policy, including, interalia, the aspect of downstream investments by Indian companies with foreign investment, made through internal accruals, being on the automatic route; 100% foreign owned NBFCs, with a minimum capitalization of $ 50 million, being permitted to set up subsidiaries for specific NBFC activities, without bringing in additional capital towards minimum capitalization; inclusion of share premium received along with face value of the shares only when it is received by the company upon issue of the shares to the non-resident investors towards Minimum Capitalization etc.
* The Government has also initiated stakeholder consultations, by inviting suggestions on various aspects of FDI policy, including sectoral policies. Discussion papers on five areas of FDI Policy, including FDI in Retail and Defence sectors, FDI in Limited Liability Partnerships, Issue of shares for considerations other than cash and approval of foreign/ technical collaborations in case of existing ventures/ tie-ups in India have been released for public consultation.
* The total FDI that has flowed into India since the onset of the liberalisation process (August, 1991-August, 2010) is nearly US$ 141.35 billion. This represents only the equity capital component of FDI. Under international practices of reporting, i.e. including equity capital, reinvested earnings and other capital, the figure comes to US $ US$ 172.11 billion, for the period April, 2000 to July, 2010.
* There has been a tremendous growth in the FDI inflows to India since 2003-04. FDI equity inflows have risen nearly thirteen-fold, from US $ 2.23 billion in 2003-04 to US $ 27.31 in 2008-09 and US $ 25.89 billion in 2009-10.
* FDI, as per international practices of reporting, includes equity capital, reinvested earnings and intra company loans. According to the international practices of reporting, total FDI was US $ 6.13 billion in 2001-02; US $ 5.04 billion in 2002-03; US$ 4.32 billion in 2003-04, US$ 6.05 billion in 2004-05; US$ 8.96 billion in 2005-06, US$ 22.83 billion in 2006-07, US$ 34.84 billion in 2007-08, US $ 35.18 billion in 2008-09 and US $ 37.18 billion in 2009-10.
* As such, while the FDI inflows have somewhat flattened out over the course of the last three years, the pace of inflows has been stable, including during 2009-10. This is despite the fact that, as per UNCTAD’s World Investment Report, 2010, the global economy witnessed a 16 percent decline in FDI inflows in 2008 (from over $ 2.099 Trillion in 2007 to $ 1.771 Trillion in 2008) and further witnessed 37 percent decline in 2009 (to 1.114 billion)
National Manufacturing Policy
The manufacturing sector has kept pace with the overall growth rate of the economy, based on its strengths of a diversified base and a large pool of scientific and technical manpower, but contributing at just over 15 percent of the GDP, the sector has not yet reached its full potential in India.
To address this situation, the government aims to bring out a new National Manufacturing Policy that will create the macro environment needed to accelerate industrial growth and promote critical sectors of manufacturing to address employment and strategic concerns of the nation. Good physical infrastructure, a progressive exit policy, structures to support acquisition & development of technology, including green technologies, and business friendly approval mechanisms will be the cornerstones of this new initiative.
The objectives of the policy will be to: Promote investment in the manufacturing sector and make the country a manufacturing hub for both domestic and international markets; Increase the sectoral share of manufacturing in GDP to 25% by 2022; double the current employment level in the sector; Enhance global competitiveness of the sector. A discussion paper on the Policy has been hosted on the DIPP website on 31st March, 2010 to elicit views from stakeholders. The concept is being discussed with various agencies, including concerned government departments and will be finalized shortly.
The e-Biz project is one of the 27 Mission Mode Projects (MMPs) under the National e-Governance Plan (NeGP) of the Government being implemented by the Department of Industrial Policy & Promotion, Ministry of Commerce & Industry. It is a major initiative of the Government of India to create a business and investor friendly regulatory regime in India. The project aims to create an online single window for all licences, approvals and payments required by investors and businessmen and eliminate the need for multiple visits by the business users to central, state and local government offices.
The project will be implemented in phases over 10 years in the PPP mode with the first three years being the pilot and roll out phases. During the 1st year, 18 Central services and 11 State services are being made available online in 5 pilot states, namely AP, Haryana and Delhi.
The beta version of the e-Biz portal was launched in December 2009 to demonstrate the ergonomics and workflow of the portal. Process documents are nearing completion for all the services for the pilot phase. The required hardware is in the process of being operationalized and the project is expected to be ready to go live by the end of 2010.
Disclaimer: The views expressed by the author in this feature are entirely his own and do not necessarily reflect the views of INDIACSR)