Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Like the late Muhammad Ali, the Indian government fights best with its back to the ropes. Amid a balance-of-payments crisis 25 years ago, it dispensed with four decades of industrial licensing in a day. Something similar is happening again, though this time the damage the government is trying to limit has more to do with its credibility than with investors' confidence in the economy.

On Monday, India relaxed foreign investment limits in industries ranging from retail to broadcast and aviation to pharmaceuticals. Although one can dispute the claim by the office of Prime Minister Narendra Modi that the changes will make India "the most open economy in the world" for foreign direct investment, the timing left no doubts about what prompted them.

Another BRIC in the Wall
India trails other major emerging economies in terms of foreign direct investment as a percentage of GDP
Source: World Bank, Bloomberg

If the new rules pave the way for the first Apple store in India, CEO Tim Cook should send at least an iTunes gift card to Reserve Bank of India Governor Raghuram Rajan.

On Saturday, Rajan said he'll return to the University of Chicago when his three-year term ends in September, becoming the first Indian central bank chief in almost a quarter century to be denied the customary five years. The respected economist's abrupt departure came after a series of increasingly personal attacks from right-wing Hindu leaders of the ruling party. Since local businessmen are seen as clear winners from the end of Rajan's drive against crony capitalism, the government sensed global investors would read his exit as a signal that India was turning to more inward-looking economic polices.

Similar speculation of a U-turn had arisen last November, after Modi's party lost a crucial state election. The government tried then to reassure markets by relaxing foreign investment norms. It's now becoming something of a pattern. The next time the headline reads, "FDI norms relaxed further in India," investors might well ask: "What's gone wrong now?"

Timing apart, the changes could help. If the market for foreign investment resembles an international beauty contest, India has for too long been the ugly duckling. While it raced ahead of China as the most-preferred destination for foreign investment last year, it still has a way to go.

The Home and the World
The value of India's inbound M&A is well behind that of comparably-sized economies
Source: Bloomberg

France's stagnant economy is about the same size as India's, and the country isn't known for its openness to red-in-tooth-and-claw capitalism. It's still seen a bigger volume of inbound M&A in 34 of the past 40 quarters, and the U.K. has achieved the same feat in 37 of the 40.

What are the opportunities for investors?

The devil will be in the detail of the government's 780-word statement on the sectors to be liberalized, not to mention how the new rules are implemented. Foreigners will be allowed to own 100 percent of airlines running domestic services -- even those who, unlike Malaysian-born, British-educated AirAsia Group CEO Tony Fernandes, can't claim an Indian ancestor . India's aviation market isn't for the faint-hearted, but with rapid demand growth and some of the industry's biggest beneficiaries of low oil prices, there's huge potential for those with a desire to invest.

Plane Sailing
The return on invested capital of India's major airlines is among the best in the world
Source: Bloomberg

Airports are also being opened up, with foreign companies now permitted to buy 100 percent of existing sites. A new plan to lure rail passengers to short-haul flights that cost no more than $37 could swell traffic at small airports, making them a good investment for global infrastructure funds.

Any Port in a Storm
Operating returns on equity of major airport operators
Source: Bloomberg
Note: Operating return on equity used because some airport operators use related-party loans to minimize taxable profits and maximize untaxed interest payments.

Retailing also has potential. Foreign chains weren't allowed to operate in the country without a local partner until a previous bout of rule-shredding four years ago, but local-sourcing rules have continued to hinder activity. H&M currently has more stores in Malmo than in the whole of India. Those rules will now be dropped, raising the prospect that the country's first Apple store may eventually open. 

Allowing overseas investment of up to 74 percent in existing pharma companies without prior government approval could spur foreign takeovers in India's highly successful generic drugmaking industry. Facing heightened U.S. regulatory scrutiny on their production processes, many of the smaller players would be glad to be acquired. There will be looser rules, too, on food, broadcasting and defense.

On balance, the changes represent a welcome embrace of greater openness. Rajan has guided the economy through hard times, despite the hindrance of antiquated rules. His successor will at least be free of that burden.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Foreign airlines will be limited to a 49 percent share but other types of investors can go up to 100 percent.

To contact the authors of this story:
Andy Mukherjee in Singapore at
David Fickling in Sydney at

To contact the editor responsible for this story:
Matthew Brooker at