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Govt. eases SME sourcing, investment rules for FDI

The government Thursday decided to hike the foreign direct investment limits in a host of sectors, notably telecom, oil refineries, commodity bourses, power exchanges and stock exchanges and relaxed the policy for retail, giving clear signal to overseas investors that the economic reforms were on track.

The decisions were taken by the federal cabinet chaired by Prime Minister Manmohan Singh.

The foreign direct investment (FDI) limit for telecom sector has been increased from 74 percent to 100 percent.

To lure international retailers like Walmart, Tesco and Carrefour into the country, the government relaxed policy related to FDI in multi-brand retail.

Talking to reporters after the cabinet meeting, Commerce Minister Anand Sharma said the government has decided to relax the policies related to mandatory sourcing, investment in back-end infrastructure and selection of cities.

Regarding mandatory sourcing from the small and medium enterprises (SMEs), Sharma said the USD 2 million investment ceiling for identification of SME was required for at the time of engagement.

As per the earlier norms it was mandatory for the overseas investors to source at least 30 percent of goods from SME, which has investment of less than USD 2 million.

There was ambiguity that what will happen if the investment of SMEs crosses USD 2 million.

Sharma said this investment limit would be application only at the time of engagement.

The government last year had opened the gates for multi-brand retail sector to foreign investors by allowing up to 51 percent FDI.

However, no foreign investment has taken place in the sector so far. Global retailers like Walmart, Tesco and Carrefour have been demanding further clarifications in the policy.

The government has also clarified the policy related to need for mandatory 50 percent investment in back-end infrastructure.

According to the minister, the required 50 percent investment in the back-end infrastructure would of the initial investment. Later on the companies can take investment decision based on their business requirements.

Regarding the selection of cities, Sharma said the state governments would be allowed to chose the cities where no town was eligible as per the original regulation that has the ceiling of 1 million population.

Only 53 cities in India have more than 1 million population.

In Asset Reconstruction Company, the government proposes to hike FDI limit to 100 percent from 74 percent.

For petroleum refineries, upto 49 percent investment will be allowed through automatic route. Earlier approval from the Foreign Investment Promotion Board (FIPB) was required.

Most of these decisions were taken by the inter-ministerial meeting chaired by the Prime Minister July 16.

Sharma said the union cabinet and the cabinet committee on economic affairs largely endorsed the decisions taken by the inter-ministerial panel July 16.

For telecom industry, the decision to allow 100 percent foreign equity will help a host of domestic promoters, reeling under billions of dollars of debt.

The move will allow the companies like Vodafone Group, Telenor and Sistema to operate in India without having a local partner.

The Foreign Direct Investment inflows to India declined to USD 22.42 billion in 2012-13 from USD 36.50 billion recorded in the previous year. The decision is expected to revive the FDI, which is crucially important to finance the current account deficit.

Current account deficit, the difference between the country's total imports of goods, services and transfer and their exports, touched a record high 4.8 percent of GDP in the financial year ended March 31, 2013.