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Image: Getty Images/AFP/P. Paranjpe

India opens up its economy

June 20, 2016

India has announced a broad relaxation of foreign direct investment (FDI) rules in a number of key sectors, including aviation and defense. The move is part of an effort to open up the country's economy.


As part of an effort to boost foreign direct investment (FDI) in India from last year's $55 billion (48.4 billion euros), the government of Prime Minister Narendra Modi decided on Monday to deregulate investment in nine sectors.

These include civil aviation, defense and e-commerce, as well as pharmaceuticals, single-brand retail and private security agencies.

The changes allow foreign companies to completely own Indian companies in these sectors. Modi descibed the move as "radical," making India "the most open economy in the world."

More freedom for Apple and IKEA

The new rules stipulated that foreign companies will be allowed to own local airlines outright, compared to a previous 49-percent cap. Investment controls over building and modernizing airports around the country will also be eased.

The cap on investment in defense was raised to 100 percent from 49 percent, subject to government approval, in cases which give India access to modern technology.

In addition, single-brand foreign retailers can now operate stores for three years before having to comply with local sourcing rules - and for five years if they can prove their products are "cutting edge" or "state-of-the-art."

This deregulation stands to particularly benefit global brands such as IKEA and Apple. Just last month, Apple chief executive Tim Cook tried in vain to convince Modi to relax a rule that forces the iPhone-maker to buy at least 30 percent of its parts locally if it wants to open stores in India. Now Apple is seen to be moving closer to opening stores in the vastly lucrative market.

"We will inform Apple to indicate whether they would like to avail new provisions," Rajesh Abhishek, a senior official with the Department of Industrial Policy and Promotion, told a news conference Monday.

The new reform measures also ease restrictions on inbound investment in what is termed "brownfield" pharmaceuticals - already existing pharma businesses - allowing foreign companies to own up to 74 percent of a firm without government approval. In new "greenfield" projects they can already own a 100-percent stake.

Rajan resignation forced Modi's hand

The changes came after popular central bank governor Raghuram Rajan announced over the weekend that he would not seek a second term from September.

Rajan - the darling of financial markets - is credited with helping reform and revive India's economy. His announcement raised concerns among analysts about the Modi government's commitment to reform.

In this context, the newly-announced reforms were "fairly significant," said Shilan Shah, India economist at Capital Economics in Singapore.

"It might be the government's way to illustrate its commitment to reforms and mitigate any investor fallout following Rajan's decision," he told the news agency Reuters.

uhe/jtm (Reuters, AFP, dpa)

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