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Insights into Editorial: Abolishing FIPB: Red tape herring?
In a few weeks the 25-year-old Foreign Investment Promotion Board that came into existence when the economy was liberalised, will cease to exist. This could not have come at a more opportune time. With the rest of the world turning protectionist, India needs to remove the vestiges of impediments to inflow of capital.
The FIPB was set up in the early 1990s as an inter-ministerial mechanism to vet investment proposals from abroad.
- FIPB comes under the purview of the finance ministry’s department of economic affairs. It was first constituted under the PM office during the process of economic liberalisation in the early 1990s.
- The job of the FIPB was to vet Foreign Direct Investment (FDI) proposals in India which went on the government’s approval route. It had the power to consider and recommend FDI. In the process of making recommendations, the FIPB provided inputs for FDI policy-making.
Composition of FIPB:
Secretary, Department of Economic Affairs, Ministry of Finance was the chairman of the board which consisted of 1. Secretary to Government, Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, 2. Secretary to Government, Department of Commerce, Ministry of Commerce & Industry, 3. Secretary to Government, Economic Relations, Ministry of External Affairs, 4. Secretary to Government, Ministry of Overseas Indian Affairs.
What necessitated dismantling of FIPB?
- A person filling a proposal for the FIPB’s consideration had to provide some 18 documents duly filled and presumably in duplicates and triplicate. In any case, it was also getting redundant with more than 90-95 per cent of investment coming in through the automatic route.
- FIPB was among the last remaining controls in an era of reforms. It acted more like a middleman and was made up of five secretaries and discussed FDI proposals with several ministries.
- The government believes that once the Board is history, red-tapism will shrink, ease of doing business will improve and investors will find India more attractive.
The Department of Industrial Policy and Promotion under the Commerce Ministry is now expected to formulate a standard operating procedure to process foreign direct investment applications in 11 sectors that are still not in the automatic FDI approval list. The department would have to be consulted by line ministries, which have been empowered to take ‘independent’ decisions on investments proposed in their domains.
Other areas that need attention:
It should be noted here that over 90% of investment flowing in already does not require an FIPB nod as it comes in through the automatic route. And while the FIPB may have delayed clearances at times, the efficacy of this move will be determined by the ability of individual ministries to exercise ‘discretionary’ powers without fear, favour or the cover provided by a collective decision-making body.
Cumbersome rules, not the FIPB, have been responsible for a less than enthusiastic response from foreign investors in some sectors. For instance, global insurers can hold up to 49% ownership in Indian ventures but only if Indians retain management and control over these entities — this is an onerous definition of control that has inhibited deal-making. Despite allowing 100% FDI in food retail, rules prohibit foreign players from using a small fraction of their shelf space for non-food items, affecting investment plans. This, in a sector that can create millions of jobs and boost farm incomes. On the other hand, archaic land acquisition and labour laws continue to make it difficult for large factories to come up.
The FIPB, over time, had become another bureaucratic stronghold, with all the accompanying malpractices. The abolition of the FIPB needs to be seen as a part of the government’s efforts to make India more investor friendly, along with other recent steps like time-bound resolution of insolvency. However, there is still long way to go. The government should take additional steps to make the country more investor friendly.