In a power-packed panel discussion with CNBC-TV18, experts talked about what the government's FDI move means for the economy and sectors.
In a power-packed panel discussion with CNBC-TV18, KPMG Partner and Head of Aerospace and Defence Amber Dubey, Kalyani Group CEO of Defence Business Rajinder Bhatia, former P&G CEO Gurucharan Das, former Pfizer MD Kewal Handa and EY India's Hitesh Sharma talked about what the government's FDI move means for the economy and sectors.
CNBC-TV18 was the first to report the change in the FDI norms.
Below is the verbatim transcript of the interview.
Q: Let me start by asking you because the liberalisation across two of the sectors that you track, civil aviation and defence, let me start by asking you first about the defence sector. How significant is it going to be now that the government has said that state-of-the-art of technology is no longer going to be conditionality or a caveat attached to going beyond 49 percent for the defence sector? Remember, even earlier on a case-by-case basis, with the transfer of technology, a global player could go up to 100 percent but the government has now done away with the state-of-the-art technology caveat. What does this mean now for the defence sector?
Dubey: It is an earth shattering sort of announcement; took all of us by a pleasant surprise. Coming back to specifics, for years we have been asking for 74 percent on defence and 100 percent on aviation and today even in defence they have taken it right up to 100 percent. So, it is a fantastic day.
Coming specifically to your point about state-of-the-art, yes, there was this provision that under state-of-the-art category you could go for maybe even 100 percent. However, when we talk to many of the leading companies, they are very uncomfortable with that because there is always a risk of a political witch-hunt five year or 10 years down the line because most of these investments come with a 20-25 year horizon and nobody wants to get into a political witch-hunt 5-10 years down the line where this definition of a very subjective term called state-of-the-art would have been very controversial.
So, now they have watered it down to very simply modern equipments or other reasons as maybe noted. Now, this just completely opens it up. So, I think it is a great day, heavily liberalised and we might see the floodgates open now.
The other beauty is that those who are keen, will anyway come and those who have been hiding behind the FDI gates, saying FDI is not very high so we won’t come, they will get exposed now. Now that FDI gates are open, now if you don’t come it will be very clear that you just want use India as a buyer and not as a partner.
Q: Dubey says that finally this will mean dollars coming to the defence sector in India because let’s be clear, there have been issues of control global players wanted to come into India, but they have been uncomfortable coming in without control. With this now do you believe that domestic manufacturers maybe at a disadvantage or does this really open up the game so to speak?
Bhatia: I have a slightly different opinion about it. I think it is just a minor tweaking of the policy. There is not a major change which has come in. Previously, there was a question of high technology and question of how do you define the word high technology which could have caused a little issue and Amber is right in saying that somewhere down the period another 3-5 years somebody would call what was called a high technology at that. To that end, only that condition has been removed. No other parameters -- automatic route still remains 49 percent, case by case you can go beyond that -- are changed. Yes one fact will certainly happen is that you will always want to come will certainly come in.
All those who are behind this will also get exposed, but to me this changes not a great change in the sense that it is exactly aligned to the policy which were in existing before. Only thing is that this has been tweaked, but I am more satisfied with the second part which is that even small arms FDI has now been allowed, which means that this is a positive step towards opening of the sector and permitting people to have joint ventures in a segment which was hitherto forward denied to the private industry.
Q: Overall, materially, how big are the changes that have been announced, pharmaceutical, civil aviation, defence, food marketing, food processing, airports, what is this finally going to mean in terms of fund inflows? We have already come in at record USD 55 billion of FDI, do you think that the measures that have been announced by the government today, this is going to really be a game changer?
Sharma: I think one is, yes, a positive step, even in the pharmaceutical sector because it does liberalise the whole investment norm and investors don’t have to wait for almost two to three months window of getting the FIPB approvals.
However, is it a game changer? Not very sure because it is not that baring a few cases you had the whole FIPB rejecting FIPB applications in this sector. So, it is easing it, certainly that helps, and it takes away a little bit of controversy around or it gives a little more certainty around private equity and some of the strategic joint ventures. So, to that extent it is great; game changer, I am not really sure of.
Q: Let me get you to comment on what we have seen happened today. In a sense while these have been decisions that have been on the anvil the timing of the decision very clearly the government coming out batting on the front foot trying to maintain its reformist credentials, trying to send out a signal to the world that India is open for business, Raghuram Rajan there or doesn’t there does not matter?
Das: Well, I agree with you. I think it is very well orchestrated. The timing was perfect. We have scored a self goal with regard to Raghuram Rajan and totally unavoidable situation that was created and so they have done it right now. This is November last year there was another after the Bihar elections there was a major liberalisation removing FDI caps, putting more things on the automatic route and that’s very good. This reflects a new confidence of the country. It’s the old fear of the world is slowly receding.
The old inferiority complex that is still held by certain people, I just heard a CPIM spokesperson who was saying that the worst possible thing that could happen and an RSS person getting very upset about it. So those kinds of reaction are almost going away and it is true we have become one of the most open societies to foreign investment and what is good that the bureaucrats who always been the most negative about this because that’s bureaucrats years on caution.
Now you won’t find them saying: "Oh, but this is not really high technology. This is not state of the art". You put bureaucrats in a difficult position when they have to make decisions about whether that technology is a high technology or a low technology. And frankly it is a matter of pride that India has now reached the stage as one of the largest receivers of foreign direct investment. It crossed China in 2015 and the United States both. And I personally feel that we are slowly becoming part of the global supply chain. Defence will be the one that will be the gamechangers.
Some of the Indian companies may not like it and I don’t agree with the gentleman from Kalyani who said that, “Oh but this is tweaking. No it’s not tweaking”. A lot of foreign companies will come if they have a 100 percent. They won’t come otherwise and they will now come.
Q: For the civil aviation sector, just about a week ago, we had civil aviation policy being finally given approval of the cabinet and now this. One was expecting an FDI cap change to happen along with the civil aviation policy and the government has surprised us by going all the way up to 100 percent but the interesting thing is that foreign carriers cannot go beyond 49 percent. So, the cap for foreign carriers remains at 49 percent, NRIs were anyway allowed a 100 percent, who do you believe is going to be interested, what is the kind of money that you expect to come in into the sector?
Dubey: It is a very pleasant surprise. In fact last week we were on your channel itself and we were cribbing about the fact that while the draft said that we will consider 100 percent FDI in 2020, but the final policy did not mention it. However, we then later on heard from some friends that there could be some surprise coming in and we didn’t know it is going to be of this extent. So, very happy about this.
Coming specifically to your point about the airline cap, yes, the airline cap has been kept at 49 percent and looking at the way this government is going towards less government and more governance, we feel even that cap might go away with time. I think there is right time for everything.
However, having said so, tomorrow someone like a Qatar can come in with a Qatar Foundation, Qatar Airways takes 49 percent and the remaining 51 percent can be with the sovereign fund or with some private equity or with some individual. So, we can actually have airlines coming in India which are 100 percent foreign owned of which 49 percent will be with the airline and the remaining 51 percent can be with individuals or other entities. So, I think this is a game changer and will bring in investment, jobs, more global connectivity.
Q: For the pharmaceutical sector how meaningful are the changes going to be, the extent policy on pharmaceutical provides for 100 percent FDI under the automatic rule in greenfield pharma and FDI up to 100 percent under the government approval route in brownfield pharma, so what is this now going to mean because the government has now decided to bring it up to 74 percent under the automatic rule in brownfield and government approval route beyond 74 percent will continue. What will this mean for the pharma sector?
Handa: Just in the month of May, the Commerce Ministry and Industry Ministry had commissioned an expert committee to look into the brownfield impact of the FDI in the brownfield basically, to look at it whether it had impact on the access and affordability of medicines because of the takeover of Abbotts Piramal and the other companies.
Now without waiting for the report, the report was to be given within 3-4 months but this government announced that now up to 74 percent in the brownfield there is no automatic approval will be done. So I think it is the urgency which this government is looking at to encourage an investment in the pharmaceutical sector. If you can actually tie this up with the ecosystem within this country particularly the way the things are at the pricing front, particularly the way things are at the patent front.
If you want to have a larger investment they are looking at an unlisted company. Suppose a company wants to buy Cipla -- to give you an example -- how do you unlock the entire thing, so that Cipla can become an unlisted company. Will you make that possible for a multinational company you really get the foreign direct investment? That’s the next stage of liberalisation you should be looking at. What are the roadblock within this country that is stopping the FDI investment to come in?
Q: Let me ask you about one of the sectors that has been opened up or liberalised today and that has to do with food products manufactured and produced in India. This was a budget announcement. It is now being operationalised with this decision today a 100 percent FDI being allowed under the approval route even for e-commerce for trading in respect of food products manufactured in India. To your mind is this going to be a significant game changer?
Das: Well, I think it will help, but the big gamechanger along with this would have been to really change the norms for FDI in multi-brand retail. This government has eased sourcing norms for single brand retail. That’s quite clear and it’s going to bring in quite lot of investment, but multi-brand retail is something that they have to come to grips with. The last government did do it, liberalised it.
Q: There is no change to the multi-brand policy it remain as is except that this government doesn’t welcome FDI into multi-brand retail but the policy stand as is.
Das: I know but why isn’t multi-brand retail coming into India because the sourcing norms are onerous. Nobody would come. You would be a fool to make a commitment if you were Walmart or somebody else, so you have to change the sourcing norm which they now realised were wrong and they have done it for the case of single brand, so they should now do it for multi-brand and it will come. So the food processing and all these sectors would benefit and the biggest beneficiary would be the farmer at the end because today that farmer at the mercy of the APMCs and that’s would liberate them from the APMCs.
Q: Are we likely to see significant inbound FDI in the pharmaceutical sector, in light of what has been announced today?
Sharma: I think that the impetus that you have seen in the past will continue. It will get strengthened with probably more of private equity and strategic investors looking at with this liberalised norm with being able to take up a higher stake. I think government should also clarify on whether the hi-tech areas like biotech and nanotech are not merged with pharmaceutical; that will help it further.
As Kewal Handa mentioned, if the special committee actually comes out with recommendations where the pressures that the government has around the pricing and the access and other related areas, if those get clarified, I think those along with this initiative will certainly boast the overall investment in the sector in pharmaceutical.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.