Indian government announces FDI liberalization

The new rules, announced in a press circular by the Department of Industrial Policy & Promotion (DIPP), allow 100% FDI in food retail, including e-commerce, as long as the items sold are produced, processed or manufactured in India. The aviation and pharmaceutical sectors have also been affected, along with defense-related companies and private security agencies.

Prime Minister Narendra Modi said that the rule change will make India the most open country in the world for FDI. However, the changes in many cases are not straightforward. In several industries, including defense contractors and most broadcasters, FDI is permitted under the automatic route only for up to a 49% stake; investment above that limit must be approved by the government, though technically up to 100% foreign ownership is allowed. In other sectors, such as publishing, FDI is permitted up to 100%, but any foreign investment must be cleared by the government.

Online hyperlocal delivery services such as Grofers or BigBasket, both of which have raised considerable capital from offshore investors, could benefit from the removal of FDI limits on food retail. However, the requirement that all food items be sourced within India could present difficulties, as both platforms allow the sale of merchandise produced overseas; also, it is not clear whether the rules apply to non-food items, which are also available through these outlets.

DIPP's announcement is effective as of June 7, and follows previous liberalizations implemented earlier this year. Most notably, the government announced in March that it would allow 100% FDI in online marketplaces - but not in inventory-based e-commerce operators - while limiting their ability to offer discounts.

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