Arun Jaitley did a great thing by abolishing FIPB

Amid a multitude of expectations, finance minister Arun Jaitley presented the Union Budget 2017-18 in Parliament, one which was low on fireworks but high on pragmatic and incremental changes.

Expansion of the tax base by reducing tax rate in the Rs 2.5-5 lakh income bracket, special focus on agriculture and rural sector, push towards a digital economy, beginning the process of cleaning up political funding and increased infrastructure expenditure are among the key highlights of the Budget.

That the government did not deviate from the path of fiscal consolidation, despite the various pressures, is particularly noteworthy.

In the domain of the financial sector, there was one major announcement made, the decision to abolish the Foreign Investment Promotion Board (FIPB). 

Foreign Direct Investment (FDI) flows into India in two ways, the automatic route and through government approval. FIPB deals with the latter. Housed in the department of economic affairs, ministry of finance, the FIPB is an inter-ministerial body, responsible for processing of FDI proposals and making recommendations for government approval.

Besides the chairperson, who is the secretary from the department of economic affairs, the body comprises of secretaries from the department of commerce & industry as well as the ministry of external affairs.

Decisions of the FIPB are taken on the basis of existing FDI policy, press notes and other related notified guidelines formulated by Department of Industrial Policy and Promotion (DIPP) in the ministry of commerce.

The finance minister, who is in charge of FIPB, would consider the recommendations of FIPB on proposals with total foreign equity inflow of and below Rs 5,000 crore. Whereas the recommendations of FIPB on proposals with total foreign equity inflow of more than Rs 5,000 crore (earlier Rs 3,000 crore) would be placed for consideration of the cabinet committee on economic affairs.

The sectors under the automatic route, however, require no approval from the FIPB and are subject to only sectoral laws. Over the years, increasing liberalisation of the country’s FDI regime has resulted in more and more FDI through the automatic route. The FIPB has lost its erstwhile pre-eminence and the discretionary power with its bureaucrats doesn’t inspire much confidence within foreign investors.

Over the last two years, the Narendra Modi government has taken up a number of reforms to liberalise the FDI regime. In November 2015, 15 sectors were liberalised for FDI. Then in June 2016, the government made sweeping amendments to the FDI policy in seven sectors, most importantly in defence, civil aviation and pharmaceuticals.

Earlier, in the defence sector, FDI up to 49 per cent was permitted under the automatic route and up to 100 per cent through the government approval route, but only for cases resulting in access to "state-of-the-art" technology.

This condition of "state-of-the-art" technology, which was somewhat vague and hard to quantify, was done away with. In the aviation sector, reforms paved the way for allowing overseas entities to own 100 per cent in domestic airlines, and 100 per cent FDI under the automatic route in both greenfield and so-called brownfield projects.

Further, the government has taken other kinds of measures such as relaxing FDI norms for NRIs, PIOs and OCIs – allowing their non-repatriable investments to be treated on a par with domestic investments and not be subjected to FDI caps.

The government has also decided to grant Permanent Residency Status (PRS) to foreign investors who meet some set criteria in respect of minimum investment and employment generation. It would be granted first for 10 years, with multiple entry, and could be extended for another 10 years.

Those granted PRS will also be exempted from the registration requirement and given the right to purchase one residential property to live in. Countries like Singapore and Hong Kong, which are favoured FDI destinations across the globe, offer residency status for foreign entrepreneurs in return for investment.

The liberalisation of FDI along with various other measures including those under the Make in India initiative have shown visible impact. According to the World Investment Report 2016 released by the UN Conference for Trade and Development (UNCTAD), India’s FDI inflows have increased to $44 billion in 2015 as compared to $35 billion in 2014.

But there is a lot of potential and they need to grow further. The net FDI inflows as a proportion of GDP have shown a sharp rise after the NDA government took office, but it is still 1.7 per cent, compared to 2.8 per cent of China or 4.9 per cent in the case of Vietnam - the highest among major developing countries.

The decision to abolish FIPB and come up with a new roadmap can therefore be seen as part of the larger strategy of the government to boost FDI inflows. The finance minister in his Budget speech pointed out that presently over 90 per cent of total FDI inflows are through the automatic route and that we have now reached a stage where FIPB can be phased out.

Earlier in the speech, he also said: “India has emerged as the sixth largest manufacturing country in world, up from ninth. We are seen as the growth engine of the world. We have moved from a discretionary administration to a policy-based administration.”

This is a clear message to investors that India is the best bet for assured and rapid growth in an otherwise uncertain global scenario. In the climate of increasingly inward looking and protectionist tendencies across the world, the abolishing of FIPB and the statement of intent to further liberalise FDI policy sends out an encouraging signal.

It is a move that would boost ease of doing business, reduce red tape and make FDI easier.

Also read: FDI reforms at last: Kudos to Modi sarkar