Pushed to the wall by a weakening currency and a high current account deficit, the government on Tuesday decided to raise the FDI (Foreign Direct Investment) caps for a host of sectors and shift some from the FIPB approval route to the automatic approval route. Sectors where caps were raised include defence production and telecom and insurance while the automatic approval route will now be available for petroleum refineries, power, stock and commodity exchanges although the sector limits remains unchanged at 49%.
The cap for insurance was hiked from the current 26% under the automatic route to 49% but the proposal will require legislative sanction. Foreign players can also now hold 100% in asset reconstruction companies. As for single-brand retail, where 100% FDI is permitted, foreign investors can now invest up to 49% via the automatic route. The decisions were taken on the basis of the recommendations of the Mayaram Committee at a high-level meeting chaired by the Prime Minister which lasted more than 90 minutes. No decisions were taken for the pharmaceuticals sector and the civil aviation sector.
FDI in the defence space will now be permitted up to 49%, albeit with caveats, the earlier limit was 26%; the move will be welcomed by conglomerates like the Mahindras and Tatas For the telecom sector, the cap has been raised to 100%; the move will benefit the UK-based Vodafone Plc and the Norway-based Telenor, both of whom have been wanting to set up 100% entities in India. Foreign carriers will be disappointed that the government has left the FDI limit at 49%; this will leave them with minority stakes.
While the move will be viewed as investment-friendly by foreign corporations, the government will need to ensure that the fine print is not intimidating, as has been the case with multi-brand retail; moreover, it would also need to hand out clearances expeditiously, especially those for land and environment. The decisions need not be ratified by Parliament.