India has a new National Democratic Alliance government led by Narendra Modi. Following two successive years of sub 5% growth, key cabinet ministers of economic portfolios such as finance, law and commerce have made statements regarding the need to improve investor sentiment and revive growth.
The new law and telecommunications minister, Ravi Shankar Prasad, stated that “retrospectivity in law should normally be avoided, as it is very evident that India needs foreign investment”. The government would provide stable policies so that there are no uncertainties for foreign investors, he added.
Mixed signals were given by the commerce minister, Nirmala Sitharaman, who ruled out FDI in multi-brand retail for now as small and medium-sized traders and small farmers have not been adequately empowered and may be affected. This statement amounts to a reversal of a decision taken by the previous government allowing 51% FDI in multi-brand retail in September 2012. Interestingly, Tesco's FDI in multi-brand retail in the form of 50-50 joint venture with the Tata Group firm Trent Hypermarket has just been approved by the Competition Commission of India. This happens to be India’s first FDI transaction in multi-brand retail.
Finance ministry officials have also ruled out raising the FDI cap of 26% to 49% in the insurance sector. This also goes against a cabinet decision taken by the previous government in October 2012. If the new government of Mr Modi decides to keep the FDI cap at 26% in insurance, the limit will be applicable to the pension sector as well.
"We have to look afresh at this issue whether 49% [FDI should be allowed] or there could be some other instruments without raising it to 49%. All these issues we have to address,” financial services secretary GS Sandhu stated after making presentations to the new finance minister Arun Jaitley.
Finance ministry officials are also working on a liberal foreign investment framework that will allow a 49% FDI limit in most sectors without requiring time-consuming government approvals. “If ownership and control rests in Indian hands, sectoral caps can be set at 49% as a default barring a few sectors”, stated an official to Indian newspaper Economic Times.
Defence, railways, e-commerce and media may benefit from this policy, while also opening up the possibility of a compromise on multi-brand retail by scaling back the FDI limit from 51% to 49%. Clearly, all eyes are on the first budget of Mr Modi's government, which is expected in early July, when these policy initiatives may be announced, including whether the retrospective tax provisions – that targeted companies like Vodafone --will be reversed in the Finance Bill.
N Chandra Mohan is an economics and business commentator based in New Delhi.