INDIAN ECONOMY

CURRENT AFFAIRS 2017

5. FOREIGN INVESTMENT PROMOTION BOARD (FIPB)
DESCRIPTION
Since the early 1990s, India allowed FDI in most sectors through the automatic route.
But, in certain segments considered sensitive for the economy and security, the
proposals were to be first cleared by FIPB.

Thus, the Foreign Investment Promotion Board (FIPB) is an inter-ministerial body that
offers a single window clearance for applications on Foreign Direct Investment (FDI)
belonging to the approval route.

COMPOSITION
It comprises of the Secretaries of main Ministries of GOI.
Chairperson: Secretary of Department of Economic Affairs.
Members: Secretaries of DIPP, Department of Commerce, Ministry of External Affairs,
Ministry of Overseas Indian Affairs, Department of Revenue and Ministry of Small and
Medium & Micro Enterprises. However, the Board can co-opt those persons
(secretaries, officials or experts) as may be required.
It is housed in the Department of Economic Affairs, Union Ministry of Finance.

FUNCTION
To quickly approve Foreign Investment proposals.
To review FDI polices and to set up guidelines that are transparent and which
encourage FDI into various sectors.
To look over the implementation of the various proposals those have been
approved by it.
To take up activities that encourage FDI into the country.
To identify those sectors which require FDI.
Presently, FDI proposals up to 3,000 crore rupees are cleared by the FIPB. However,
proposals involving more than 3,000 crore rupees are given final clearance by the
Cabinet Committee on Economic Affairs (CCEA).

While the Government now allows FDI in most sectors through the automatic route,
there are some such as broadcast content, print media, multi brand retail and banking
where foreign investment is restricted (in most cases less than 50%) and allowed only
through the Government approval route.

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RECENT DEVELOPMENTS
FIPB will be abolished in 2017-18 as declared by the Finance Minister in his Budget
speech.

WHY ABOLISH?
The concept of the approval route is against the rule of minimum government.
While the FIPB had the final say in approving Foreign Direct Investment (FDI) proposals
in the country for long, its power has been systematically reduced under the current
government. In 2016, the Government had announced relaxed FDI norms in single-
brand retail, civil aviation, airports, pharmaceuticals, animal husbandry and food
products. This ensured that more than 90% of total FDI inflows are now through the
automatic route. Thus, FDI approvals over the years have been brought down and are
currently required only for 11 sectors.

WHO WILL PERFORM FIPBS DUTIES?

All FDI applications, their processing and approval will be handled by the concerned
Ministries/Departments in consultation with the Department of Industrial Policy &
Promotion (DIPP), Ministry of Commerce.

Proposals over sensitive sectors will be looked upon by the Home Ministry.

DIPP will also issue the Standard Operating Procedure (SOP) for processing of
applications and decision of the Government under the extant FDI policy. It is noted that
the concurrence of DIPP would be mandatory with reference to FDI applications which
are rejected by the concerned Ministry/Department.
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DISADVANTAGES
Even after dismantling FIPB, the approval regime would continue with sectoral
departments being in charge of granting approvals to FDI inflows. If this is true,
then dismantling the FIPB without simultaneously abolishing the approval route
will be counter-productive.
It will end up increasing costs associated with the approval process, as it will
require investors and the firms to deal with multiple departments in administration.
Indias capacity to ensure affordable medicines or vaccines may be
compromised. FDI in brownfield or existing pharmaceutical companies are
marked by profitability rather than welfare. The new arrangement eliminates the
ability of the Health Ministry to impose changes/ conditions in their case, which
falls under the Department of Pharmaceuticals, Chemicals and Fertilizers Ministry.
Although there are doubts about the FIPBs effectiveness, this inter-ministerial
body provided a forum to assess the implications of FDI in a holistic manner.

ADVANTAGES
The approval mechanism makes the system vulnerable to regulatory discretion
regarding capital controls and induces unpredictability in the process.
Retaining this route mechanism indicates that despite our liberalisation of capital
inflows, we rely on Central Planning for the economy.
It creates artificial entry barriers.
Dismantling FIPB will help rationalize our FDI regime and improve ease-of-doing
business within India.

RECOMMENDATIONS
Abolishing FIPB without addressing the underlying flaws of Indias investment
approval process is nothing short of an exercise in futility. For further rationalising and
liberalising of the FDI policy, the move must be complemented with a single
comprehensive law governing capital inflows in India.

This law must resolve the fundamental issues plaguing the process and bring about
reforms such as-
Binding timelines for concerned ministries/ departments for various actions.
Clear guidelines on the purpose of Government approval itself.
Requirement of Government approval only for foreign investment in sectors that
are strategic from the viewpoint of National Security or to address Emergency
situations such as war or balance of payments crisis.

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 The law should also focus on accountability of the Government. It should provide
clear, time-bound legal processes and require the Government to give reasons for
rejecting an investment proposal.
Redesigning of the primary law; the Foreign Exchange Management Act (FEMA).

MODEL QUESTION
1. The recent move to dismantle the Foreign Investment Promotion Board (FIPB) is said
to increase Foreign Direct Investment (FDI) into India. How does it propose to do so?
Suggest other measures to attract FDIs.

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