'FDI move will attract investors, soothe nerves'

Prime Minister Manmohan Singh's move to permit 51 per cent FDI in multi-brand retail, 49 per cent investment by foreign airlines in aviation sector and sale of equity in four public-sector run companies will attract overseas capital, boost investor confidence and soothe the nerves of the ratings agencies, they say.

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"The government's decision to attract FDI into various sectors - especially in multi-brand retail - is a very positive move. While it will be several quarters before things on the ground change, the series of moves announced last week are very important to boost investor confidence, create the notion that the country is open for business again and possibly avert a ratings downgrade," says Sajjid Chinoy, India Economist, JP Morgan.

"The government now needs to follow up these reforms by resolving actual implementation bottlenecks on the ground - especially as they relate to the infrastructure sector," he says.

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"FDI in retail will help in stopping wastage in agriculture produce and provide more options to farmers and consumers," says Ashima Goyal, Professor of Economics at Indira Gandhi Institute for Development Research in Mumbai.

"Second, apart from the role FDI will play in agriculture and agricultural marketing, is that it signals that the government is doing something because there are limitations on fiscal and monetary policies in the current slowdown, so there has to be other types of actions that can boost investment and restart the economy," she says.

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Goyal says the decision to allow FDI will have a positive impact in short and medium-term. When asked why the government decided to initiate these measures now, she says: "The government did announce these measures in November 2011, but there was a lot of opposition, so they were forced to roll back the steps.

"The complaint, which was a valid one, at that time was that political parties were not consulted prior to the announcement," she says.

This time, it seems the government has written to different states, talked to various players, prepared themselves and adjusted their proposals accordingly, says Goyal.

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"Coming a day after the fuel price announcements, the decision of the government to ease FDI norms in an array of sectors, such as multi-brand retail, civil aviation, power trading exchanges and broadcasting is a tremendous boost not only to the sectors in question, but is a huge mood lifter," says Chandrajit Banerjee, Director-General, Confederation of Indian Industries, in a statement.

"The despondency that had set in owing to absence of policy announcements would certainly be addressed to some extent. Global and domestic perceptions would also change and CII is hopeful that the rating agencies would take due note of these announcements as well," he says.

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The move to increase FDI caps in these sectors will help mobilise capital into these sectors, which the country needs and would also improve the current account deficit situation, which was becoming alarming, says Banerjee.