May 24, 2017 / 3:59 PM / 2 months ago

India scraps foreign investment board in push for more FDI

4 Min Read

FILE PHOTO: Indian Prime Minister Narendra Modi (R) listens to Finance Minister Arun Jaitley during the Global Business Summit in New Delhi January 16, 2015.Anindito Mukherjee

NEW DELHI (Reuters) - India on Wednesday scrapped a ministerial panel responsible for coordinating foreign investments, part of efforts by Prime Minister Narendra Modi to boost funding of local industries from overseas.

Set up soon after India embarked on its first market reforms in 1991, the often unwieldy Foreign Investment Promotion Board (FIPB) was tasked with approving foreign investments proposals.

Finance Minister Arun Jaitley said the cabinet agreed to abolish the FIPB, honoring a budget pledge he made in February. Foreign investments would in future be cleared by individual ministries.

Since taking office in 2014, Modi has gradually eased restrictions for foreign investors, opening nearly 90 percent of the country's industrial base, including the defense sectors and the railways, to back a "Make in India" push.

India attracted $60 billion in foreign direct investments in the year to March 2017, up 8 percent from the previous year, government data showed.

In comparison, China's FDI soared 40 percent to a record $189 billion in 2016, despite an economic slowdown.

Though India's economic growth has been strong, this is being mainly driven by state and consumer spending, prompting the government to take measures to revive capital investment in the private sector.

Jaitley said investments in security-sensitive sectors would require additional clearance by the interior ministry.

Investors said FIPB decisions often become bogged down in infighting between government ministries, leading to delays in projects being approved. One analyst suggested the board's removal had been inevitable.

"With FDI caps being raised progressively and around 92 percent foreign direct investment coming through the automatic route, the rationale for FIPB doesn't exist anymore," said Sachchidanand Shukla, chief economist at Mahindra Group, India's leading conglomerate.

Bureaucratic Hurdle

But India remains a tough place for investors, rising just one place to 130th in the World Bank's ease of doing business ranking for 2017.

Its sovereign debt is rated one step above junk by S&P Global, Moody's and Fitch, making it difficult to attract investments.

Global companies trying to set up units in India often face months of struggle to get administrative approvals, as has been the case with Apple (AAPL.O)

The cabinet also approved giving preference to local manufacturers in government contracts, he said. For orders valued at more than 5 million rupees ($77,000), only local suppliers will be eligible if there is sufficient local capacity and competition, a government statement said.

India will also launch a long-awaited new national goods and services tax (GST) from July, replacing a slew of federal and state levies with a view to making it easier for firms to file tax returns.

"The government needs to follow through its moves on ease of doing business," said Mahindra Group's Shukla, adding labor reforms should be the next move after ensuring smooth GST implementation.

"Both of these will spur inflows going forward."

Modi faces the challenge of creating employment for nearly 1 million youth entering the jobs market every month, meaning he can ill afford the economy to slow from its current high growth rate of near 7 percent.

Additional reporting by Nigam Prusty and Rajesh Kumar Singh; Editing by John Stonestreet

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