Government Announces FDI Reforms To Boost Economy, Market Sentiment

Days after announcing a slew of measures to boost India's slowing economic growth, mainly by prompting growth in the automobile and real estate sectors, the government, on August 28, 2019, announced several reforms to the exiting rules pertaining to foreign direct investment (FDI) in the country. Apart from allowing 100 per cent foreign investment in coal mining and contract manufacturing, the government also eased the sourcing norms for single-brand retailers and approved 26 per cent overseas investment in digital media.

In single-brand retail trading (SBRT), the definition of 30 per cent local sourcing norm has been relaxed and online sales permitted, without prior opening of brick-and-mortar stores. With this, the centre has now made it easy for several global giants to enter India, in a move that the government hopes, will lead to larger FDI inflows, contributing to the growth of investment, income and employment. As corporations would not have to set up brick-and-mortar stores and can directly start online sales of products, they would find it more convenient to invest in India.

"Online sales will lead to the creation of jobs in logistics, digital payments, customer care, training and product skilling," commerce minister Piyush Goyal told media, after the cabinet meet on August 28, 2019. "The changes in the FDI policy, will result in making India a more attractive FDI destination, leading to benefits of increased investments, employment and growth," the minister added.

Reacting to the announcements, Shubhranshu Pani, MD - retail services and stressed asset management group (SAMG), JLL India, said: "This new ease in FDI norms, will give a big boost to global brands and make the Indian market attractive for them. Primary segments that will benefit, would be electronics, mobiles, apparels and luxury goods. Under the new norm, retailers will need to open physical stores within two years. The measure will also help retailers, who otherwise used to incur an initial cost on setting up the physical store. However, a two-year period seems less as typical shopping centres have a 3 to 4 year construction period and many prime locations may have already been blocked. However, it would not be a deterrent as the brands can commence with e-commerce immediately, with limited physical stores and wait for the newer shopping centres to emerge."

Commercial real estate in India is among the priciest in the Asia-Pacific Region and setting up a brick and mortar store, requires large capital investments from companies, a factor that has so far restricted FDI in India. Growth in rentals in Bengaluru’s Central Business District (CBD) Brigade Road, has been the fifth-highest seen in Asia-Pacific in the April-June quarter of 2019, shows Knight Frank's Asia-Pacific Office Rental Index. While Delhi’s Connaught Place (CP) and Mumbai’s of Bandra-Kurla Complex (BKC) remain the priciest office spaces in India, Bengaluru’s CDB clocked the highest annual growth in terms of rents, the index shows.

Shishir Baijal, chairman and managing director, Knight Frank India, maintains that “The regulations on FDI in retail have come a long way, in terms of cash-and-carry wholesale trading, e-commerce and single-brand retail segments, where 100% FDI is allowed. Even while the local sourcing norms for a segment of single-brand retail entities were relaxed in the past to 30%, technologically-focused and specific product foreign retailers did face business constraint, in terms of procurement. With the relaxation of this local sourcing condition, foreign retailers will be able to decide the best combination of procurement quality and cost and have a higher willingness for participation in the country’s burgeoning consumption market.”

At $64.37 billion, FDI in 2018-19 has been the highest-ever received in any financial year. Earlier, the centre provided tax relief for foreign portfolio investors (FPIs) and startups, apart from infusing Rs 70,000 crores in the banking sector, to revive demand.

With inputs from Housing.com news