The latest FDI rule changes may not be enough to draw a rush of investments

On the face of it, the Centre’s announcement on Foreign Direct Investment (FDI) norms on Wednesday appears to be one more push to make India a more attractive destination to overseas investors, especially those keen on entering the market for the long haul. From extending the available 100% FDI under the automatic route in the coal mining sector (till now permitted only for captive consumption) to include those companies seeking to commercially sell the commodity, to distinctly including contract manufacturing under the automatic 100% route and easing local sourcing norms for overseas investors in the Single Brand Retail Trading (SBRT) business, the changes in investment guidelines approved by the Cabinet have been touted as “FDI policy reform”. The government, clearly concerned by the economic slowdown and persistently weak investment activity, has sought to provide a policy fillip to attract more foreign capital into sectors that it sees as having a multiplier effect particularly in terms of job creation. One must also consider the pressing contexts. Earlier this month, the RBI pointed out that net FDI flows had moderated to $6.8 billion over the first two months of the current fiscal year, from $7.9 billion in April-May 2018. And with Prime Minister Narendra Modi having set a goal of ensuring India becomes a $5 trillion economy within the next five years, the overall consumptive capacity needs to be raised manifold to undergird demand growth. To that end, the act of widening reforms in coal mining, manufacturing and retail is completely understandable.

A closer examination, however, raises several concerns about the ultimate attractiveness of these changes. For instance, the tweaks to investment norms on coal appear at first flush to be a win-win for both the economy at large and the coal industry, the environmental costs of focusing on one of the most polluting fossil fuels notwithstanding. This is predicated on the prospect of seeing an influx of both capital and modern technology into mining and processing, as well as raising domestic supply of the key raw material for power, steel and cement production thereby cutting costly and burgeoning imports. But for foreign mining companies to make a beeline to pitheads, several related regulatory and market challenges will have to be addressed post-haste. Large miners will need economies of scale and so require access to large contiguous fields with minimal bureaucratic constraints on operations. While domestic thermal power plants have had to rely on increased imports in recent times, many of the electricity producers themselves are in financial stress. How much additional investments may actually accrue is not clear.