The first union budget of the newly elected NDA government did not disappoint the market expectations and announced a substantial increase in the foreign investment limit in defence, manufacturing and insurance sectors. The proposal to increase foreign direct investment augers well for the government and the underlying sectors as it showcases a future economic roadmap of the government.
With the increase in FDI in his maiden budget speech, the finance minister has also made it clear that the NDA government would not be surrounded by any policy paralysis and can take decisions quickly. Increase in FDI especially in the cash staved insurance sector has been pending since 2008.
Defence Sector: The Defence sector has been one of the biggest beneficiaries of the increase in Foreign Direct Investment which will be increasing from 26% to 49%. Clearly underlining the importance for such a move, Mr. Jaitley said that India today is a largest buyer of defence equipment in the world but our domestic manufacturing capabilities are still at a nascent stage. The increase in FDI in defence sector would open the doors for a several foreign players to have a local existence with full domestic management under the FIPB route.
Insurance Sector: The budget has brought good news for the insurance sector as a whole which has struggled to flourish and consolidate for the lack of adequate investments. The insurance sector at present is investment starved. Increasing the composite FDI cap in the sector from 26 to 49 & offering full management control through FIPB route will pave way for expansion of the sector as a whole said the finance minister. Analysts and industry experts of the capital starved private insurance sector have welcomed the announcement with insurance stocks likely to reflect the news with a bull run in the short term.
Manufacturing and e-Commerce Segment: With the announcement of FDI in manufacturing sector the finance minister has underlined the government’s role on focusing on offering incentives for small manufacturers and MSMEs in order to promote entrepreneurship. FDI in the manufacturing sector is today on the automatic route and the announcement of FDI in the sector would make it possible for more small manufacturers to enter the online market, banking on the marketplace business model of e-commerce portals. While there was speculation that FDI would be approved for e-commerce space allowing foreign companies to enter the online sale segment without the need for a marketplace model, it has not been approved as of now.