15th November 2005: The big-bang liberalisation of the foreign direct investment (FDI) policy, promised by Prime Minister Manmohan Singh, has taken final shape, with the commerce & industry ministry identifying seven sectors for removing barriers to foreign investment.
The sectors chosen include petroleum, coffee & rubber, mining, coal & lignite, power trading, airports and trading. While there are some differences of opinion in liberalising FDI in wholesale trading of telecom products, and mining of precious stones, a broad consensus within the government has been arrived at in all other areas.
The FDI liberalisation roadmap, recently forwarded to the Prime Minister by commerce & industry minister Kamal Nath, includes permission for 100% foreign investment in gas pipelines meant for natural gas through the automatic route.
As of now, the government permits only 74% FDI in this segment through the automatic route and prior permission is required to exceed this limit. A similar proposal has been made for infrastructure related to marketing of petroleum products.
Mr. Nath has also proposed 100% FDI in airports under the automatic route compared with the current 74%. The government's earlier position was that 100% FDI can flow into greenfield airports, but that can be done only with the government's prior permission.
The letter to the Prime Minister also calls for 100% FDI through the automatic route, for exploration and mining of diamonds as well as precious stones. However, the department of mines is of the view that the status quo should be maintained in this sector - restricting FDI under the automatic route to 74%.
Mr. Nath is also of the opinion, that 100% FDI should be allowed under the automatic route for processing and warehousing facilities for coffee and rubber. Ownership of plantations would be excluded from this liberalisation, which will be restricted only to processing and warehousing facilities as this can lead to value additions.
The recommendations from Mr. Nath follow a call by the Prime Minister for FDI liberalisation to boost economic growth. An inter-ministerial group carried out a thorough review of the FDI policy for all sectors before the suggestions were finalised. All the concerned ministries and departments were also consulted.
For coal & lignite as well, Mr. Nath has suggested that FDI up to 100% be allowed for captive mining under the automatic route. As of now, FDI is allowed only to the extent of 74%, except in the case of captive mining by power plants. The liberalisation available to the power sector is now being extended for all other purposes.
In case of trading, the commerce & industry ministry feels the policy should be rationalised, while retail is still being kept out of the FDI ambit in view of opposition from the Left.
Therefore, Mr. Nath has suggested that FDI in trading be allowed under the automatic route for all purposes, including wholesale trading and imports for re-exports. This facility is already available for units located in SEZs.
Currently, FIPB permission is required to trade, and views of government departments may differ depending on the nature of the permission required.
Cash & carry trading, export trading, and trading of high-tech products would all be viewed as wholesale trading, attracting similar treatment under the new dispensation.
The only exception to liberalisation of FDI in wholesale trading could be telecom, where the department of telecom feels 100% foreign investment should not be allowed under the automatic route.
Allowing wholesale trading under the FDI route and paving the way for foreign investment in institutional sales would discourage investment in manufacturing of telecom equipment, the department feels.
There is considerable opportunity to attract FDI in telecom equipment manufacturing and the potential should not be wasted, the department has argued. The final view on the issue would be taken on the basis of directions from the PM, it is understood.
While carefully avoiding sensitive areas like insurance and retail, Kamal Nath has gone full-throttle in power trading, proposing 100% FDI through the automatic route.
Though such clearances would be subject to compliance with sectoral regulations, there will be no need to approach the FIPB. The proposal is based on the Electricity Act of '03, which permits trading in electricity as a licensed activity.