India to Ease Foreign Investment Caps in Steps to Bolster Rupee

India’s government proposed to ease foreign-direct investment limits in some industries as part of measures to lure capital inflows, revive economic growth and bolster the rupee that touched a record low this month.

Among the decisions taken at a meeting led by Prime Minister Manmohan Singh was a plan to allow overseas investors to own all of a phone carrier, Commerce Minister Anand Sharma told reporters yesterday. The changes would also permit foreign investment in defense production exceeding the current 26 percent cap, if India gains access to modern technology.

India is wooing funds needed to finance a record current-account deficit as the rupee plunged 7.3 percent against the dollar this year and the $1.9 trillion economy expanded at the slowest pace in a decade. The easing of the foreign-direct investment rules is the latest in a slew of measures announced by policy makers in the nation’s finance ministry and the central bank to help reverse the slide in the local currency.

“All hands appeared on deck to stabilize the financial markets and set the reforms machinery in motion,” said Radhika Rao, an economist at DBS Bank Ltd. in Singapore. “These non-debt creating and durable inflows are preferable over short-term capital to fund the current-account deficit.”

RBI Action

Finance Minister Palaniappan Chidambaram said in March that he had kickstarted the review of the FDI caps as gross domestic product rose 5 percent in the 12 months through March, the smallest gain since the year ended March 31, 2003. The Reserve Bank of India on July 15 tightened money markets to make rupee funds more expensive after the currency touched an unprecedented low of 61.2125 a dollar on July 8.

A statement released after Sharma’s briefing late yesterday showed the meeting agreed on plans to allow 49 percent foreign-direct investment through the automatic route in petroleum and natural gas and refining, as well as commodity, power and stock exchanges.

In single-brand retailing, up to 49 percent would be allowed through the automatic route, with investment of 49 percent to 100 percent requiring government approval.

Prime Minister Singh began a series of policy changes in September to spur expansion in Asia’s third-largest economy and avert a credit-rating downgrade.

Retail, Aviation

The steps have included liberalization of foreign investment limits in the retail and aviation industries, faster approvals for public works, lower levies on overseas buyers of local bonds and higher taxes on gold imports.

Etihad Airways PJSC agreed in April to buy a 24 percent stake in Mumbai-based Jet Airways (India) Ltd. for 20.6 billion rupees ($349 million), taking advantage of the changes.

Singh’s policy push had foundered as protests over alleged graft in government disrupted parliament, impeding bills seeking to allow overseas companies to invest in the pensions industry for the first time, and hold as much as 49 percent of insurance businesses.

Foreign-direct investment slid about 21 percent to $36.9 billion last fiscal year compared with 2011-12.

The current-account deficit widened to $31.8 billion in the last quarter of 2012, equivalent to 6.7 percent of gross domestic product, before narrowing to $18.2 billion in the following three months.

For the measures announced by the government to translate into material inflows, India needs to address bottlenecks in its economy, said DBS’s Rao and Rupa Rege Nitsure, an economist at Bank of Baroda in Mumbai.

“The steps are in the right direction but not sufficient,” said Nitsure. “India won’t become an attractive destination for foreign capital unless it resolves the issues of bad governance, inadequate infrastructure, and policy uncertainty.”

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