Cost of reform push
To the uninitiated, under the automatic route investors do not need government approval beforehand. Other sectors in which FDI norms have been relaxed include e-commerce in food products, broadcasting carriage services, private security agencies and animal husbandry.
Sectors where 100 percent FDI will be allowed include the pharmaceuticals industry, civil aviation, animal husbandry, and e-commerce related to food products manufactured in India and broadcast technology such as DTH, cable and mobile television, according to the government. Significantly, a previous condition that required incoming technology in the defence sector to be “state-of-the-art” has been omitted, in lieu of just "modern" technology.
Paving the way for Apple to open its own stores India, the government relaxed FDI norms by giving a three-year exemption from local sourcing to foreign players in single-brand retail and a further five-year relaxation for "state-of-art" and "cutting-edge" technology.
Apple has been lobbying hard for the exemption from the mandatory 30 percent local sourcing on the grounds that its products have such high-end technology and were, therefore, could not be sourced locally here. Prior to the Modi government’s capitulation, India employed a reasonable negotiation tactic that Apple can open its stores and profit from the massive Indian consumer opportunity if it sources a certain percentage of its components from India or shifts a part of its manufacturing to India.
It’s hard to gauge what changed. Nonetheless, such a policy could hurt India’s interests. “Relaxation of local sourcing norms for state-of-the-art technology-based retail trading companies will subdue opportunities for suppliers to increase their business and upgrade technology skills,” says Rahul Pandey, an entrepreneur and visiting faculty at IIM-Lucknow, in a recent column for The Wire.
“Small industries, most of which are suppliers to larger firms, constitute an overwhelming majority of India’s industrial base. A policy that goes against their interest is therefore detrimental to the "Make in India" agenda.” Various pro-big business publications including the Economist had termed India’s tactic against Apple as one of the “trials and tribulations of doing business in India”. Quite evidently, such a view entails treating India as a third-world country with an obligation to a first-world corporation.
The Centre’s primary objective behind its decision to relax FDI norms is to provide a major impetus to employment and job creation in India. Instead of promoting employment, this policy will perpetuate the trend of jobless growth in India. Political parties opposed to the policy have argued that a much larger share of returns on investments will go outside India, especially with 100 percent FDI owned entities.
Meanwhile, there are other sector-specific dangers associated with 100 percent FDI. “Hundred percent FDI in animal husbandry, retail and trading of food products might lead to greater consolidation and control of farmland and other agricultural assets in the hands of large corporations,” says Pandey.
“This will make a majority of small farmers and farm-dependent families more vulnerable and accelerate distress migration to cities.” The government’s decision to omit the previous condition that the required technology in the defence sector needs to be “state-of-the-art” is baffling, considering the need to develop higher-end capabilities among local industries and entrepreneurs.
However, this is not to suggest that India do not need foreign investment or that improving the ease of business is a bad motive. At a time when the private sector seems hesitant to invest and the government is tied down by the banking crisis, India needs foreign capital to keep its growth engines running. Various administrative measures by the Modi government have enhanced FDI inflows.
As per recent reports, there has been a 23 percent surge in inbound FDI, which touched a high of $55.5 billion in 2015-16. However, the Centre’s recent FDI policy is promoting foreign investment at the cost of other fundamental objectives such as "employment, skill upgradation of agricultural and small manufacturing economies and development of domestic manufacturing capability with state-of-the-art technology".
TMC leader and Rajya Sabha MP Derek O'Brien said it best: “This will have a negative effect on employment, the economy and the Indian market as a whole. In the name of "Make in India", they are breaking India.”