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How FDI in retail, aviation will boost India's growth

Last updated on: September 21, 2012 14:33 IST

How FDI in retail, aviation will boost India's growth

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Vinay Mahajan

After quite a long pause the government has finally pressed the reforms button. Strengthening rupee and cheering capital market indicates that these steps have been received favourably.

The optimism is also in anticipation that this could the beginning of series of economic reforms which were on hold for a long time; nonetheless these steps are expected to revive the Indian economy in the long run.

The government recently announced 51% in Foreign Direct Investment (FDI) in multi-brand retail and 100% FDI in single-brand retail.

FDI norms in aviation sector also have been relaxed, which will now allow the foreign aviation firms to invest in Indian aviation sector.

The broadcasting sector has also been liberalized by allowing up to 74% FDI. Amid these reforms announcements, the government also decided to hike diesel prices by 12 per cent or Rs 5 per litre.

The author is Vice-Chairman and CEO, MoneyHouse, a financial services firm.

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These moves will open doors for the international multi-brand retailers a few to name are Wal-Mart, Carrefour, Tesco etc.

Single brand retailers to name a few, Louis Vuitton, Adidas, Armani, Gucci etc can now have full ownership of their India operations.

The multi-brand retailers are now allowed to sell directly in India and they can benefit immensely from the fast growing middle class population.

The minimum limit for the single-brand retail FDI has been set at $100 million while the investment has to be made in the areas like cold storage chains and warehouses.

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So far, foreign investors in aviation sector were allowed to invest up to 49% stake in domestic airline companies but the criteria for the investment was that the investor should not be related to the aviation sector.

However, now with relaxed FDI norms, foreign aviation companies are open for the investment in domestic Indian aviation companies with up to 49% stake.

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The government has also decided to liberalise the broadcast sector which will apply to segments like broadcast carriage services providers, including Direct-to-Home, Multi-Service Operators (MSOs) and Cable TV in order to bring uniformity in the segment.

Till now, FDI for Cable TV and DTH were allowed up to 49%. News channels and FM radio will not be affected with the new reforms and will continue 26% FDI.

The Indian economy will be affected by these reforms immensely. Allowing FDI of 51% stake for multi-brand retailers will be creating job opportunities in the location of their stores as well as in the procurement chain.

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The criterion for single-brand retail companies is that the companies will need to fulfill the requirement of 30% local procurement while doing business in India, if they are looking for the waiver of the mandatory 30% local procurement, they will have to setup a manufacturing facility in India.

This reform will widen the choices available to end consumers, farmers, logistics companies, SMEs, in addition to the benefit of competition.

The standard of consumption will be raised as better quality products will be made available to the consumer at a cheaper price.

The adverse effect of this reform would be on the Indian companies which will not be able to withstand the competition. 

While on the other hand it will create new job opportunities while the farmers are expected to get their proper dues and this may lead better distribution of wealth.

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How FDI in retail, aviation will boost India's growth

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Relaxing FDI norms in aviation sector will provide the much-needed cash flow to the domestic aviation companies as well as this will bring in investments in aviation technology which will eventually improve flight operations, ground handling, evolved safety standards and overall better aviation experience and wider choice to flyers.

It is also expected that the international aviation companies will bring the best management practice so that the operations are taken place efficiently.

While the competition in the aviation sector will increase immensely with the presence of international company, the growth of the Indian aviation sector will also be impacted positively.

Since majority of the Indian aviation companies are in financial crunch situation, this step may give lease of life.

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How FDI in retail, aviation will boost India's growth

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For broadcasting companies the scene is bit different, these companies have a big growth potential. The government has allowed liberalization of broadcast sector by 74 % FDI which will allow the broadcasting companies to expand much faster.

The estimated household with cable and satellite TVs are around 106 million. Out of the total number, close to 26 million have installed DTH and over 80 million get feed from the cable network. The sector is poised to hugely benefit from these reforms.

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How FDI in retail, aviation will boost India's growth

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On the fiscal measure front, the government hiked the diesel prices.

This has been the boldest move of the union government. The price hike would put pressure on inflation and this will increase the transportation cost and hence the final price of consumer goods.

At the same time this will lead to reduction of under recoveries by Rs 20,300 crore of oil-marketing companies.

This also gives RBI room to ease monetary policy further even after marginal cut in the CRR. However it would largely be depending on inflation expectation.

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The FDI announcements made by the government in multi-brand retail, single-brand retail, aviation sector and broadcast sector are expected to change the landscape of the respective industry.

Rather than focusing on the short-term objectives, the recent economic reforms will lay a foundation for the Indian economy to once again reach the nine per cent growth mark.

The interesting aspect of this reform would be to see whether the growth supersedes the inflation rate or the inflation races ahead of the growth rate. In a growing economy, inflation is bound to be on a higher side, but the economy is said to be healthy when the growth outperforms inflation.

These reforms are just the beginning and India Inc expects the government would continue making such policy decisions in future too, all are optimistic about that!


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