India eases foreign investment rules

NEW DELHI - The Indian government has made a fresh move to stimulate growth with a widely-anticipated decision to open up the defence, telecommunications and insurance sectors to foreign investors.

Analysts hailed the move - which is subject to Cabinet approval - as a positive step, but said they do not expect a rush of foreign investments just yet.

Regulatory hurdles remain, they said, such as a lack of coordination among different government departments.

"This is only one step in the right direction, many more steps need to be followed to see capital flows at the end of the tunnel," said Professor N.R. Bhanumurthy at the National Institute of Public Finance and Policy in Delhi.

"There are multiple agencies pulling in different directions and creating confusion among investors." Mr D.H. Pai Panandiker, head of RPG Foundation, a Delhi-based think-tank, said the government needs to do more to make it attractive for investors to come in.

Still, he said, "it is a good step".

The Indian government, facing a slowing economy and sinking rupee amid corruption scandals, is keen to restore investor confidence.

On Tuesday night, after a meeting chaired by Prime Minister Manmohan Singh, it decided to allow 100 per cent foreign ownership in the telecoms sector, up from 74 per cent.

The government will also allow investment beyond 26 per cent in defence production on a case-by-case basis in order to "access state-of-the-art technology" and eased rules in other sectors, including doing away with government approval for foreign investment in single-brand retail and petroleum refining.

The decisions are expected to be passed by Cabinet in the coming days.

The move comes at a time when Asia's third-largest economy is seeing growth slow to 5 per cent in the last fiscal year from 6.5 per cent a year earlier. The rupee has fallen to breach the 60-rupee- to-the-US-dollar mark.

A series of corruption scandals have hurt India's reputation with foreign investors. Last year, the Supreme Court cancelled 122 telecoms licences - including some held by foreign telcos - because licences were given to some companies at throwaway prices.

It is the telecoms sector that is now expected to benefit the most from the rule changes.

Foreign telcos still in the market like Britain's Vodafone Group, Norway's Telenor and Russia's Sistema now have the option of buying out their Indian partners, said Mr Jaideep Ghosh, partner at KPMG.

In the last couple of months, Finance Minister P. Chidambaram has visited countries, including Singapore and the United States, to invite investors into India.

He has good reason to worry: Foreign direct investment fell from US$36.50 billion (S$45.8 billion) in 2011 to US$22.42 billion in 2012 on the back of a slowing economy and global headwinds.

"The government is getting desperate. The slip in rupee, it took them a long time to react... Now they are becoming active," said Mr Rishi Sahai, managing director of consultancy company Cogence Advisors in Delhi.

On Monday the central bank, too, moved to support the rupee, raising rates at which it lends to commercial banks to 10.25 per cent from 8.25 per cent.

The government is now looking at opening up sectors like broadcasting, pharmaceuticals and pensions and further easing rules in retail.

gnirmala@sph.com.sg

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