Indian government delivers on its FDI promises

The Indian Union Cabinet yesterday approved foreign capital in railways and upscaled FDI caps in defence manufacture.

The promise made last month by finance minister of finance, defence and corporate affairs, Arun Jaitley, to raise the composite cap of foreign exchange in defence manufactures from 26 to 49 percent was delivered yesterday with the Union Cabinet’s stamp. The cabinet also approved proposals to allow full foreign direct investment of entire railway undertakings, save for projects’ operations. The news was first reported in local press.

With regards to defence, the decision follows the recognition of a paradox in sustaining protectionist rules given the country’s seventy percent reliance on foreign supply.

“India today is the largest buyer of Defence equipment in the world. Our domestic manufacturing capacities are still at a nascent stage. We are buying substantial part of our defence requirements directly from foreign players. Companies controlled by foreign governments and foreign private sector are supplying our Defence requirements to us at a considerable outflow of foreign exchange.” had reasoned Jaitley in his union budget speech for 2014-2015, delivered on 10 July.

The granting comes under the condition that management and control stays in the hands of Indian investors while government retains oversight with the vetting of FDI proposals via its’ Foreign Investment Promotion Board (FIPB) agency. There is controversy on whether these restrictions will discourage investors to make significant investments however.

As for railways, 100 percent FDI allowance was granted in areas such as high-speed train systems, suburban corridors and dedicated freight line projects to be implemented in PPP mode. However, the funding of infrastructure projects’ operations was excluded from the measure, according to the Wall Street Journal.

Until now, no foreign capital had been allowed in railways.  However, the new government led by Prime Minister Narendra Modi has been pushing for foreign capital to support the cash-strapped industry as access to coal mines and ports is detrimental to the economy.

Part of the railway expansion, will be supporting the modernization of the country’s defence capacity, especially in the underdeveloped and isolated Northeastern region. “Modernization of the armed forces is critical to enable them to play their role effectively in the Defence of India’s strategic interests. I, therefore, propose to increase the capital outlay for Defence by ` 5,000 crore over the amount provided for in the interim Budget. This includes a sum of ` 1,000 crore for accelerating the development of the Railway system in the border areas, “had announced minister of finance Jaitley.

Foreign players from Japan and China are said to be keen to participate in building the infrastructure.