Government approves 100% FDI in Aviation, Defence and e-commerce sectors

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The Union government has announced sweeping changes in India's foreign direct investment policy, by easing norms for a host of important sectors including defence, civil aviation and pharmaceuticals with the objective of providing major impetus to employment and job creation in country. The reforms makes India the most open economy in the world for foreign direct investment.

The government's move comes as FDI inflows rose to $55.46 billion in FY16 from $36.04 billion in FY14, reflecting India's growing attractiveness as an investment destination and status as the world's fastest-growing major economy amid global uncertainty. 

FDI Reforms in various sectors

  1. Defence Sector: Under the new reforms foreign investment in defence sector beyond 49 per cent (and upto 100 per cent) has been permitted through the government approval route, in cases resulting in access to modern technology in the country or for other reasons. FDI limit also has been made applicable to Manufacturing of Small Arms and Ammunitions covered under Arms Act, 1959. Previously FDI limit in defence sector was 49%.
  2. Pharmaceutical Sector: To promote the development of pharmaceutical sector, the government has permitted up to 74 per cent FDI under automatic route in existing pharmaceutical ventures. FDI up to 100% under government approval in brown-field pharma has also been approved. India already allows 100 per cent ownership of greenfield pharma businesses. 
  3. Food products: In this sector, 100% FDI under government approval route has been approved. It will include trading in food products including through e-commerce, in respect of food products manufactured or produced in India. 
  4. Aviation Sector: The government has allowed 100 per cent FDI in airlines compared with 49 per cent now. Up to 49 per cent FDI will be allowed under the automatic route and more than that after government permission. The FDI limit for brownfield airports has been raised to 100 per cent from 74 per cent, opening up the possibility of overseas acquisitions of existing facilities for development. This is expected to bring in more funds into domestic airlines. 
  5. Private security agencies : The private security agencies can bring in 49 per cent FDI through the automatic route. Beyond 49 per cent and up to 74 per cent would require government approval. 
  6. Broadcasting carriage : The FDI policy on broadcasting carriage services has been amended to enable 100 per cent FDI in teleports, direct-to-home (DTH), cable networks, mobile TVs and headend-in-the sky broadcasting services (HITS). 
  7. Single Brand Retail Trading: Entities undertaking single brand retail trading have been relaxed from local sourcing norms up to 3 years while the entities engaged in single brand retail trading of products having ‘state-of-art’ and ‘cutting edge’ technology have been relaxed from local sourcing norms up to 5 years.

FDI continues to be prohibited in : Atomic energy, Lottery, Gambling, Real Estate and Real Estate Investments Trusts (REIT) and Railways Operations.

Significance : The FDI reforms will give a boost to employment, job creation and benefit the economy. This is second major (FDI) reform after the last radical changes announced in November 2015. Many of the decisions were also about removing unnecessary process bottlenecks, thereby making it easy for investors to invest in India.

According to the Financial Times, in 2015 India overtook China and the US as the top destination for the Foreign Direct Investment. In first half of the 2015, India attracted investment of $31 billion compared to $28 billion and $27 billion of China and the US respectively.

India was ranking 15th in the world in 2013 in terms of FDI inflow, it rose up to 9th position in 2014 while in 2015 India became top destination for foreign direct investment. There are two routes by which India gets FDI : 

  1. Automatic route: By this route FDI is allowed without prior approval by Government or Reserve Bank of India.
  2. Government route: Prior approval by government is needed via this route. Foreign Investment Promotion Board is the responsible agency to oversee this route.
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