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FDI to pour in new “open economy”; Labour rules changed; short-term jobs a reality

 

Prime Minister Narendra Modi has virtually broken from the past and ushered in a new economy. The NDA government has allowed 100 percent FDI in defence, civil aviation, greenfield pharmaceutical projects, broadcasting carriage services – cable TV, DTH, food product e-commerce and relaxed sourcing norms for up to five years for single-brand retail trading. It also brings in ‘labour reforms” through the textile package route.

It will help foreign defence firms, food marketing companies to enter India and opens up aviation sector with increased competition.

Now IKEA and Apple can have a sigh of relief as they can set up stores. Foreign pharmaceutical companies can now also set up their units in the country.

The Prime Minister’s Office (PMO) said the decisions will make “India the most open economy in the world for FDI”. Possibly that is correct as the country also prepares for mega telecom spectrum sale.

The decision to allow 100 per cent FDI in defence marks a major push to defence manufacturing under the ‘Make in India’ initiative. The government has dropped the requirement for ‘state of the art’ technology requirement to apply for FDI relaxation above 49 per cent.

This does not mean automatic approval for defence deals. Deals above 49 per cent still need government approval but now deals not involving ‘state of the art’ technology can also opt the route. It is now called ‘modern technology”

While the government has been aggressively pushing global defence companies to set up manufacturing in India, one of the major limitations cited has been the 49 per cent FDI limit which meant the Indian partner holding a controlling stake in the joint venture. In the past, government has stated that relaxation above 49 per cent can be given on a case by case basis through the Foreign Investment Promotion Board (FIPB) for state-of-the-art technology and depending on the extent of technology transfer.

However in the past the major Indian corporate had opposed relaxation beyond 49 per cent arguing that Indian companies should be in control to build domestic expertise. The new decision virtually puts Indian companies at par with the foreign manufacturers. There is apprehension that since the foreign firms have technologies, they would have an upper hand.

The new policy may force Indian companies to re-look at their plans as it reduces the dependence of original equipment manufacturers (OEMs) on domestic manufacturers. That may change business dynamics. But it is possibly a clever ploy so that no company gets undue advantage in business, security and political brinkmanship.

But the corporate largely sees this as a win-win situation for the country’s defence forces, local industries and international OEMs. The move, companies like Tata Motors aver, will also enhance overall R&D to develop and deploy country-specific solutions.

Opening up the skies, doing away with five-year operational requirement to fly abroad will help some of the new airlines set up as joint ventures. In the long run, it virtually clears the space for entry of any foreign airlines. Competition is going to be intense and only the fittest is likely to survive.

This should have been taken as an opportunity to close down, sale or lease out the Maharaja – Air India – that drains the exchequer continuously. It’s bleeding and no amount of infusion of funds would help it. However, the new policy does not prevent that. It would be wise on the part of this government to unshackle the Maharaja and let it decide its own fate.

Severe competition is also on the cards in the broadcasting sector – cable TV, mobile TV and DTH. It would also see investments pouring in. This sector hopes to have a large Indian market. Still many regions need services of various kinds. There is expectation that high-end clients may have tailor-made needs. The market at the lower end has also scope for expansion. There is circumspection too. As the competition intensifies, possibly many groups can exit as well.

It is also to be seen how pharmaceutical companies bite the bullet. With the recent curbs on prices of scores of drugs, they may be a bit slow to invest. They are used to high profits. Social service is not in their blood. But if they decide to come, it is possible that there would be price wars to the benefit of the consumer.

A major hitch for most foreign investors is the labour law, though mostly these are observed in the breach. Recently, India refused to accept WTO norms on labour. It drew flak from Bharatiya Mazdoor Sangh. The government has virtually introduced new norms as it announced the Rs 6000 crore textile package and expects creation of one crore jobs in the textile industry over next three years. The Centre also plans to invest Rs 74,000 core in textiles.

It has allowed short-term employment of upto 150 days. Earlier it was for 240 days. But now these workers would get wages equal to those employed on regular basis. Besides, the employees can opt out of Employees Provident Fund (EPF) scheme. The government would also bear the cost of EPF contribution and give relief to the employers. It also announced Rs 5500 crore duty drawback for giving a boost to exports.

Hardcore trade unionists would see it as dilution of the present norms. But in practice the industry has been doing this in different garb. The new rules would at least ensure that all those working in the industry would be mentioned in muster roll and get the legally fixed wages. The EPF norm dilution would ensure that there would not be deduction as most such cuts went into dead EPF accounts as such small contributions were difficult to claim.

The policies may attract the foreign investors, who were critical of stringent laws. It also burdens the government with responsibility to protect the workers’ rights.

The policies apparently were formulated with precision over a period of time. They were announced in phases as well so that the people could realize that government is in action mode.

But the industry and the government have to do more to have real investment. Industry grapevines say for that strategies have to be sharpened. It is expected to have the impact in about three to five years. Followed up with élan it may change the face of India as a world manufacturing hub.

 

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