Reforms are back: Govt allows FDI in multi-brand retail, aviation

In a historic decision, the Union Cabinet on Friday cleared major economic reforms allowing 51% FDI in multi-brand retail, 49% FDI in aviation, power and broadcasting sectors and also announcing the disinvestment in four major PSUs — Oil India, Hindustan Copper, Nalco and MMTC.

Foreign airlines can now buy up to 49% stake in Indian carriers. The government approved FDI on various streams of broadcast services by up to 74 per cent. It also allowed FDI in power sector.

The Cabinet Committee on Economic Affairs also approved disinvestment in public sector units – Oil India (10%), NALCO (12.5%), Hindustan Copper (9.59%), Neyveli Lignite Corporation (5%). This move is likely to fetch Rs 15,000 crore for the government.

Foreign carriers were not allowed so far to directly invest in Indian carriers for security reasons, although 49 percent FDI by non-airline players was allowed.

According to civil aviation ministry sources, the directives for the implementation of the policy will be issued within a month.

However, any global carrier eyeing a stake in an Indian carrier must weigh up the benefits of a market with high long-term growth potential but one that has been squeezed by high costs and fierce price competition.

The move allows global firms such as Wal-Mart Stores to set up shop with a local partner and sell directly to consumers for the first time, which supporters say could transform India’s $450 billion retail market and tame inflation.

The Manmohan Singh government ignored calls from political parties for a U-turn on a hike to heavily subsidized fuel prices announced on Thursday, and also approved a policy to allow more foreign investment in airlines as well as selling off stakes in major state-run industries.

India’s inability in the past months to push through major reforms and ease its subsidy burden as growth slowed sharply has put it in danger of becoming the first of the big “BRICS” emerging economies to see its credit rating downgraded to junk.

In November last year, the same government had cleared this proposal but had to roll back the reform push following strong opposition to it from Mamata Banerjee, chief of Trinamool Congress which is a major constituent of the ruling UPA.

The government said that individual states will decide on the implementation of the move.

Earlier, when the government had okayed FDI in retail trade, it had done so with several preconditions attached to the liberalisation of the foreign investment policy regime.

The Manmohan Singh-led UPA government plans to gradually expose trade and industry to foreign investment so that the Indian industry can face this new challenge over time.

Proposals to permit FDI in multi-brand retail trading in all products, in a calibrated manner, are likely to be subject to the following conditions:

1. FDI in multi-brand retail may be permitted to the extent of 51 per cent with government approval.

2. Minimum amount to be brought in as FDI by a foreign investor would be around $100 million.

3. At least 30 per cent of the procurement of manufactured processed products shall be sourced from small industries, in the country, that have total investment in plant and machinery not exceeding $100 million.

4. The government will have the first right to procurement of agriculture products.

5. Fresh agricultural products, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meal products may be unbranded.

6. At least 50 per cent of the total FDI brought in shall be invested in back-end infrastructure. Back-end infrastructure will entail capital expenditure on all activities, excluding that on front-end units.

For instance, back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, warehouse, agriculture market produce, infrastructure, etc.

7. This valuation refers to the value at the time of installation without providing for depreciation.

8. Further, if at any point in time, this valuation is exceeded the industry shall not qualify as a small industry for this purpose.

9. Expenditure on land cost and rental, if any, will not be counted for purposes of back-end infrastructure.

10. Self-certification will be done by the company to ensure compliance of all the conditions.

11. Retail sales locations may be set up only in cities with a population of more than 10 lakh (1 million) as per 2011 Census and may also cover an area of 10 km around municipal urban agglomeration limits of such cities.

12. Retail locations will be restricted to areas as per the master zonal plans of the cities concerned and provisions will be made for requisite facilities such as transport connectivity and parking.



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