The Government of India has announced a new wave of liberalization in its foreign direct investment (“FDI”) policy issued on Monday, 20 June 2016. These developments impact a number of sectors in which investors have shown interest and are anticipated to provide further impetus to India’s strong economic growth trajectory.

Key Reforms

  • 100-percent FDI is now far more easily achievable in the defence sector. Currently, 49 percent is permissible through the automatic route, which means that government approval is not required for up to 49-percent investment. Investment beyond 49 percent is on a case-by-case basis and subject to India being likely to obtain access to “state of the art” technology. With the new reforms, the consideration regarding access to “state of the art” technology has been removed and investments in defence over and above 49 percent and up to 100 percent will be permitted through the government approval route;
  • 100-percent FDI is now permitted in the scheduled airlines industry; however, foreign airlines will be able to hold up to only 49 percent of paid-up capital in the entity concerned;
  • In the pharma sector, up to 74-percent FDI will be permitted via the automatic route;
  • 100-percent FDI in existing airport projects is now permitted; and
  • 100-percent FDI under the government route for trading of food products manufactured or produced in India, including those traded online, will now be permitted.

Single-brand retail has also benefitted by the latest round of reforms. The Indian Government has announced a three-year relaxation on local sourcing requirements that had stipulated that 30 percent of the products that such retailers sold had to be sourced from within India, with an extension of up to five years possible. This measure had previously been implemented in order to encourage local manufacturing; however, the Indian Government has chosen to adopt a long-term view on this agenda.

The latest reforms are anticipated to attract considerable interest from companies that have been closely monitoring the reform cycle. Indian Prime Minister Modi declared on Monday that the latest round of reforms “makes India the most open economy in the world for FDI.” The reforms are also expected to have a positive impact on job creation, training and development.