Government Eases FDI Limits Further To Boost The Rupee

It seems that the financial planners in the government have finally come out of the woodwork to rescue the tumbling rupee. Leading from the front is the Prime Minister, Dr Manmohan Singh.

The RBI fired the first salvo of monetary tightening on Monday, July 15, increasing the marginal standing facility by 200 basis points. New Delhi promptly responded with much more vigour on the fiscal front by hiking the foreign direct investment (FDI) limit in 13 crucial sectors including telecom, insurance, commodities, tea, state-of-the-art defence production, etc. This will certainly help bring much-needed foreign inflows into the country.

The decision in this regard was taken late on July 16 after a marathon meeting of Cabinet ministers chaired by the PM. The other sectors where the FDI cap has been relaxed include courier services, credit information entities, asset reconstruction companies, commodities and stock exchanges. In the telecom and insurance sectors the limit has been raised to 100% and 49% respectively from the earlier 74% and 26%.

Importantly, further relaxation has been allowed in insurance by putting it into the automatic route – earlier, government approval was needed through the FIPB route. Readers should note that the demand for a hike in foreign investment in the insurance sector has been long pending, especially considering the potential that the Indian market possesses, but the bill was pending in the Parliament.

It also appears that the Defence Minister’s pressure has worked, as the government hasn’t relaxed the FDI limit (currently at 26%) directly. While the limit may be raised, it would require clearance. In a press conference, Anand Sharma, the Union Minister for Commerce said, "Any FDI proposal beyond 26% in defence which brings state-of-the-art technology would be considered by the CCS (Cabinet Committee on Security)".

There are also certain sectors where increasing FDI will require the approval of the government. In telecom, for example, 49% FDI is allowed via the automatic route but anything between 49%-100% will need to be sanctioned. For some others, though the FDI limit has remained unchanged, they have been put into the automatic route, unlike in the past where the FIPB route needed to be used.

Other sectors in which the FDI cap has been relaxed are as follows:

Stock and Commodity Exchanges – The maximum limit remains unchanged at 49%, but it will be through the automatic route.

Asset Construction Companies – The maximum FDI limit has been raised to 100% from 74%, but only upto 49% will be through the automatic route.

Petroleum and Gas Refineries – The maximum limit remains unchanged at 49%, but it will be through the automatic route.

Defence – The maximum limit remained unchanged at 26%, but approval for higher FDI in case of state-of-the-art technology can be taken from the CCS.

Credit Information Companies – The maximum FDI limit has been raised to 74% from 49%, that too via the automatic route.

Aviation – No change.

Single-Brand Retail – The maximum FDI limit has been raised to 100%, but only upto 49% will be through the automatic route.

Power Exchanges – The maximum limit remains unchanged at 49%, but it will be through the automatic route.

Clearing Corporations – The maximum limit remains unchanged at 49%, but it will be through the automatic route.

Courier Services – The maximum limit remains unchanged at 100%, but it will be through the automatic route.

Tea Plantation – The maximum FDI limit has been raised to 100% from 74%, but only upto 49% will be through the automatic route.