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Clear the coast for foreign investors

Sidharrth Shankar     May 27, 2014

Sidharrth Shankar
It cannot be denied that this is the first time after 1984 that a single party in an Indian election has obtained a majority and can form the government at the centre on its own, without any coalition partners. Clearly, Narendra Modi ran an energetic campaign and spared no effort whatsoever, in pitching for the perfect economic agenda.

The path for Modi looks to be quite clear and straightforward and, given the majority that he has now, decision making should be much simpler. The mandate as given by the electorate is not only of expectations; but also of responsibility.

Modi needs to revive foreign investment. Pending projects at both the state level and the Central level need to be given immediate attention and cleared with immediate effect. Foreign investors have been adopting a wait-and-watch approach, for they wish to clearly inspect the policies of new government, before finalizing any major decisions.

One important piece of legislation which needs immediate attention is the Insurance Laws (Amendment) Bill, 2008. As we know, the current law limits investment by a foreign investor to 26 per cent in an Indian insurance company. Considering, many private insurance companies are in immediate requirement of funds, increasing this limit will be a boon for the market.

The Insurance Bill provides for the increase in foreign shareholding to 49 per cent. Additionally, the Bill will allow the entry of Lloyd's into the Indian market - which will be a positive move and will instill competition amongst dominant players in the reinsurance sector.

Modi can play another master-stroke comparable to his achievement in the election by opening up the e-commerce sector to FDI. The current regulations prohibit FDI in business-to-consumer (B2C) sales. Modi has in his earlier conversations with industry experts, expressed his desire of removing such restrictions, and permitting FDI in e-retail. Removal of FDI restrictions will have added benefits. It will give a boost to the manufacturing sector, which will in turn create more employment opportunities; capital inflow may be productive in realizing an efficient and methodical supply-distribution chain, thereby stimulating infrastructural advancement; and leading to technological innovations, etc.

Modi and his party may want to rethink their position on FDI in multi-brand retail trade (MBRT). If Mr. Modi dreams of solving the agrarian crisis, he cannot afford to throw away this tool, capable of hitting multiple pins with one ball. Other than the direct beneficiaries such as global chains and consumers, it is likely to bail out the farmers in a tremendous manner.

Collectively, with supply chains controlled by mighty middlemen and the curbs put in place by the Agricultural Produce and Marketing Committee (APMC), the farmers have been essentially debarred from selling their produce by way of competitive bidding.

In order to ensure better financial yields for farmers; intensify production; and simultaneously benefit the consumer end-there's a definite need to toss out APMC Act and permit FDI in MBRT. Further, opening up the multi brand retail sector will benefit the otherwise inferior warehouse and storage infrastructure and a broken supply chain.

Additionally, even as Modi vows to end 'tax terrorism', some voices have hinted at replacement of the existing tax framework with a banking transaction tax (BTT)to be levied on all domestic transactions by way of banking mode. This isn't particularly encouraging, as the proposed transaction tax would be regressive in nature. BTT appears to contrast the established structure of tax reforms-which has been successfully implemented till now-that the government should always undertake efforts in increasing the share of progressive taxes. Regressive tax saddles the poor segment with greater pay liabilities.

Opening up of the sensitive sectors, like defence manufacturing; making foreign direct investment automatic; reducing the number of press notes and circulars will be some of the stepping stones for making way for a favorable investment climate.

Surely, the election outcome has an important impact the future course of action by foreign investors. The coast is now clear as India has finally voted for a stable government.

The author is a Partner with J. Sagar Associates, Advocates and Solicitors. He can be reached at Sidharrth@jsalaw.com. The article was also worked on by Abhilaksh Gaind. Views are personal.


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