Economy

Changes in FDI Policy: Government Relaxes Norms, Allows 100% FDI in Defence and Aviation

The key reform decisions makes India the most open economy in the world for foreign direct investment.

Indian army officers stand on vehicles displaying missiles during the Republic Day parade in New Delhi, India, January 26, 2016. Credit: Reuters/Altaf Hussain

Indian army officers stand on vehicles displaying missiles during the Republic Day parade in New Delhi, India, January 26, 2016. Credit: Reuters/Altaf Hussain

New Delhi: The government on June 20 made changes to the foreign direct investment (FDI) policy at a meeting chaired by Prime Minister Narendra Modi. This is the second biggest reform in FDI since those announced in November 2015.

According to the amendments are meant to liberalise and simplify FDI policy to provide ease of doing business in the country, leading to larger FDI inflows that will contribute to growth of investment, incomes and employment.

The government has allowed 100% FDI in the aviation sector for scheduled carriers. Under the automatic route, 49% FDI has been permitted.

FDI in defence has also been hiked to 100%. The present FDI regime permits 49% FDI participation in the equity of a company under the automatic route. FDI above 49% is permitted through government approval on a case-to-case basis. However, for foreign airlines investing in scheduled airlines, the limit stays at 49%. The decision to relax FDI norms in the aviation sector had led to a sharp rally in listed carriers such as SpiceJet, Jet Airways and InterGlobe Aviation.

Under the new norms, 74% FDI would be allowed in the pharmaceutical sector under the automatic route, which means that foreign investors will not need government approval to invest up in existing domestic companies. Currently, FDI up to 100% is permitted in new projects in the pharma sector.

FDI limits have been hiked to 100% in teleports (uplinking hubs), DTH and cable networks, with government approval required beyond 49%.

The clause of controlled conditions for 100% FDI under the automatic route for animal husbandry has been done away with under the new policy.

The government also decided to relax local sourcing norms up to three years and a relaxed sourcing regime for another five years for entities undertaking of products having ‘state-of-art’ and ‘cutting edge’ technology.

For NRIs, 100% FDI will continue to be allowed under the automatic route.