Here’s why raising FDI cap in defence, pharma is good for Make in India

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Published: July 8, 2016 6:17:04 AM

Raising FDI cap in defence, pharma and civil aviation bodes well for Make-in-India

India has moved from the fifth-best destination in FDI in 2014 to the top position in 2015, following a series of reforms—from ease of doing business to hiking FDI caps in sectors such as insurance, defence, e-commerce, railway, infrastructure, etc. This has largely been due to the efforts of the NDA government led by Prime Minister Narendra Modi, who has played a key role wooing foreign investors and assuring them of a congenial environment for investing in India.

In continuing with its agenda of reforming the FDI policy, the government has decided to increase the FDI equity cap to 100% in several sectors, including defence, civil aviation, pharmaceuticals, animal husbandry and e-commerce. The big bang FDI policy announcement is timely. So, what are the implications of the FDI policy on sectors such as defence, aviation and pharmaceuticals?

Defence

Even after 60 years of independence, as India aims to strengthen its strategic presence globally to become a member of NSG and UNSC, the trend of 70% import of defence equipment and import-dependence in critical defence technologies does not match its aspirations. We need the best technologies and a vibrant defence manufacturing base for self-reliance. Now, with the FDI equity hiked to 100%, the industry is all set for a massive change.

Earlier, increasing the FDI limit to merely 49% had been largely ineffective in achieving India’s objective of technology enhancement, and foreign vendors had hesitated to transfer technology without ownership and management control of the Indian venture. Though FDI ceiling in defence in graded steps to 74% and 100% was allowed in case of technology-sharing and state-of-the-art technology transfer, the announcement of 100% FDI with modern technology transfer through the government route is a big step for foreign investors, particularly OEMs.

The success of a liberal FDI policy also depends on how well it is managed for the benefit of the domestic private sector defence industry. The fear of national security being compromised is over-hyped as a manufacturing facility within the country will be governed by Indian laws and is a much better option than importing. Raising the cap to 100% will provide a level-playing field to the private sector.

Pharmaceuticals

Indian pharma is one of the fastest growing industries in the world. It constitutes nearly 20% of the global generic drug exports in terms of volume, making India the largest provider of generic medicines. According to India Brand Equity Foundation, with 70% of market share—in terms of revenue—generic drugs form the largest segment of the Indian pharma sector. Over-the-counter medicines and patented drugs constitute 21% and 9%, respectively, of total market revenues of $20 billion.

The decision to allow up to 74% FDI in pharma under automatic route for brownfield investments and 100% under greenfield investments would give a further boost to the sector. The investment in brownfield can also be 100%, but through the government approval route. This will not only ensure new drugs and medicines are made available to Indian patients, but will also increase employment in the sector. It would enable enhanced investments (in the form of M&A activity) from MNCs.

However, FDI in brownfield investment has been a contentious issue, as concerns have been raised over some M&A of Indian pharma companies by foreign firms. It is believed that these M&As were impacting accessibility and growth of the generic industry in India. As per estimates, 96% of total FDI in the sector between 2012 and 2013 has flowed into brownfield investments.

Civil aviation

The National Civil Aviation Policy (NCAP) formulated by the NDA in 2016 targets to increase the number of domestic passengers from 7 crore in 2014-15 to 30 crore by 2022, by ensuring affordable civil aviation to the middle class. To realise this objective, the government has been focusing on regional connectivity and modernisation. In Budget FY17, the sector has been provided $1.16 billion for the development of airports through PPP mode, in all tier-2 and tier-3 towns. With a view to release NCAP 2016, the government allowed 100% FDI in aviation under automatic route in greenfield projects and 74% in brownfield projects.

India’s aviation industry is largely untapped; air transport is still expensive even for nearly 40% of upwardly mobile middle class. FDI would be very useful for the sector which is short of capital and some airlines are incurring losses and struggling for capital. More investment and competition would help improve regional connectivity and boost technology upgrade and management practices. This policy compliments the one announced on June 15, capping domestic fares, allowing domestic airlines to fly international without any time barriers, etc.

These big reforms will hugely contribute to the Make-in-India initiative.

The author is associate professor, Institute of Economic Growth, Delhi, and visiting fellow, Bruegel, Brussels

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