Given the economic orientation of the new government, one would expect that the Budget would make wholesale relaxations to the foreign investment policy and open up or further liberalise various sectors. But, anyone adopting that tack is bound to be disappointed as the Budget makes minimal changes regarding foreign investment.
First, the vehicle of alternative investment funds receives a boost as it now eligible to receive foreign investment. Hence, entities in India that are pooling vehicles for investments such as private equity, hedge fund or real estate funds may now attract foreign investment. This sector would therefore be able to attract further capital. However, some doubts remain on the effectiveness of such an approach given some outstanding issues (including taxation) in relation to alternative investment funds.
Second, and more significantly, the Budget seeks to abolish the differential caps on foreign investment under the two categories of foreign direct investment (FDI) and foreign portfolio investment (FPI). Currently, in several sectors there are different caps for FDI and FII. For example, in the banking sector, while there is an overall foreign investment cap of 74%, FPI is capped at 49%. The rest of the foreign investment must necessarily come in through FDI. Once composite caps are introduced, the total investment through either route (or both collectively) could be 74%. Hence, FPI would obtain more headroom and enhance their stake (which is likely to be the case in certain private sector banks as reported here and here).
Finally, the section on foreign investment refers to a “Look East Policy” with a view to encouraging Indian companies to make outbound investments in manufacturing facilities in countries such as Cambodia, Myanmar, Laos and Vietnam.
Overall, the Budget is quite thin on reforms pertaining to foreign investment. They are relatively minor in nature. The Finance Minister appears to have adopted a cautious approach, and has avoided the issue of opening up further sectors or enhancing the caps in existing sectors open to foreign investment. Given the broad focus of the Budget in terms of advancing industrial activity in India, this is somewhat surprising.