Tinkering for Optics: On FDI rule changes

FDI rule changes

Context:

  • The cabinet, on Wednesday, approved 100% FDI in contract manufacturing and coal mining.
  • 26% foreign investment in digital media has been approved and sourcing norms were eased for single-brand retailers.

Explained:

  • Till now, 100 per cent FDI in the coal mining sector was allowed only for captive consumption through automatic route. By automatic route, FDI doesn’t require prior approval of the government of RBI.
  • Captive consumption means when any organization’s manufactured goods are not sold in the market but consumed by a different division of the organisation. The purpose of captive consumption is to produce or manufacture other products.
  • With this extension, now foreign companies can directly sell commodities enter into the coal industry and directly sell its commodities for commercial benefits.
  • 100% FDI has been also approved in contract manufacturing through automatic route. Contract manufacturing is a form of outsourcing. Contract manufacturing takes place when a company makes a contract with a foreign company to manufacture its products.
  • The government further eased FDI in SBRT- Single Brand Retail Trading. Till now, for an SBRT entity which has more than 51% rcent FDI, had to procure 30% of its total goods from India. 
  • As per the new norms, the procurement of procurement for export will now be included in the 30% from local sourcing rule.

Understanding FDI:

  • FDI – Foreign Direct Investment – refers to the investment done by foreign entities like multinational companies in India. It provides employment to the local people by producing and marketing goods in India.
  • The investor owns and controls the firm in FDI. This is usually done by taking a considerable amount of shares in the company and influence its management and policies.

Why FDI is preferred over FPI?

  • FPI – Foreign Portfolio Investment – can be defined as a cross border transaction which involves investment in shares and bonds for short term benifits.
  • FDI is a prefered form of foreign investment because it is a long term investment. An FDI invested company makes infrastructural developments and provides employment. FPI, on the other hand, does not create productive assets for the economy.
Sector Old Limit Revised Limit  
Mining (Coal and Lignite) 100%- Only for captive consumption 100% for both captive consumption and direct selling
Contract Manufacturing No Provision 100%
SBRT 30% goods to be procured from India Exports will also be counted in procurement
Digital Media 49% (under approval route) 26% (under government route)

Conclusion:

At first glance, the relaxing norms appear promising for the coal industry as well as the national economy. But investment cannot be achieved without addressing the market and regulatory challenges and relaxing the bureaucratic constrains.

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