Modi Eases FDI Caps to Regain Momentum as Stocks, Rupee Drop

  • Allows 100% FDI for cable TV operators, duty free shops
  • Funds can buy up to 74% of private banks, with fungibility

India’s Prime Minister Narendra Modi eased restrictions on foreign direct investment in 15 industries in a bid to revitalize economic reform momentum and halt a stock selloff that threatens to send the local currency to a record low.

Foreigners can now own 100 percent in cable and direct-to-home TV operators, duty free shops and limited liability partnerships, the government said in a statement on Tuesday. Overseas investors can buy a 49 percent stake in defense companies and regional airlines without government approval, while those that still need permissions can get them through a simpler process.

Modi, who suffered a political setback over the weekend after his Bharatiya Janata Party lost elections in the eastern state of Bihar, is seeking to boost investor confidence by opening up India’s economy further to foreign investors. The poll defeat has raised concern Modi’s opponents will block his reform measures in parliament, pushing the benchmark stock index to the lowest in seven weeks and the rupee closer to an all-time low.

“After the Bihar election debacle, the government seems to have got on the front foot,” said Paras Bothra, a Mumbai-based vice president of equity research at Ashika Stock Broking Ltd. “These executive reforms, which don’t need parliament approval, are more important as they will boost investor confidence.”

Rupee Gains

The rupee appreciated as much as 0.2 percent after the announcement, following a 1 percent drop against the dollar on Monday, the biggest loss since Aug. 24.

In further measures, portfolio investors can buy up to 74 percent in local private banks, with full fungibility, while caps on palm, coffee and rubber plantations have been phased out. Overseas investment of up to 49 percent will be allowed in television news channels and FM radio stations.

Single brand retailers can seek relaxation in sourcing rules, provided they sell high technology products, a move that could potentially pave the way for Apple Inc. to set up its own stores in India. At present, retailers selling single brand products have to source 30 percent of their inputs locally.

“This shows the government is strong and the election results don’t really matter from the point of view of economic policies,” said Madan Sabnavis, chief economist at Mumbai-based Credit Analysis and Research Ltd. The move augurs well for the rupee, he said.

Creating Jobs

After taking national power last year with the biggest mandate in three years, Modi has wrestled with opposition parties that have blocked a national sales tax and a bill to make it easier to acquire land for factories.

Foreign direct investment into India has risen 30 percent in the April-June period to $9.5 billion from a year ago, according to data provided by the commerce ministry. It touched a record $35 billion in the 12 months through March 2012.

“Jobs will be created with increased investment inflows and these measures help boost growth,” Finance Minister Arun Jaitley told reporters in New Delhi. “We have liberalized the norms to make it more attractive for foreign investors.”

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