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100% FDI Permitted via Automatic Route for MRO Services
Context:
The Ministry of Civil Aviation has permitted 100% FDI via automatic route for the domestic aircraft Maintenance, Repair and Overhaul MRO industry.
More in News:
The other key measure undertaken by the Government to facilitate setting up of aircraft Maintenance, Repair and Overhaul (MRO) services in India are :
- Introduced a uniform 5% IGST rate on imports of aircraft parts, components, and tools.
- Extended Export and Re-import Periods: Export period for repair-imported goods extended to one year; re-import period for warranty repairs extended to five years.
- Updated MRO Guidelines: Abolition of royalties and increased transparency in land allotments at AAI airports.
- Reduced GST on MRO Services: Reduced from 18% to 5% with full Input Tax Credit since April 2020.
- Zero-Rated GST on Sub-contracted Transactions: Sub-contracts by foreign OEMs/MROs to domestic MROs are treated as ‘exports’.
- Customs Duty Exemption: Exempted on tools and tool kits.
- Simplified Clearance Processing: Easier processing of parts.
About FDI in India:
- FDI policy in India : FDI is granted under 3 categories in India
- Total FDI inflows in the country in the FY 2023-24 is $70.95 Bn.
- Top 5 countries for FDI equity inflows into India FY 2023-24 are
- Mauritius (25%),
- Singapore (23%),
- USA (9%),
- Netherland (7%) and
- Japan (6%)
The top 5 sectors receiving highest FDI Equity Inflow during FY 2023-24 are:
- Services Sector (Finance, Banking, Insurance, Non Fin/ Business, Outsourcing, R&D, Courier, Tech. Testing and Analysis, Other) (16%),
- Computer Software & Hardware (15%),
- Trading (6%),
- Telecommunications (6%) and
- Automobile Industry (5%).
The Top 5 States receiving the highest FDI Equity Inflow during FY 2023-24 are:
- Maharashtra (30%)
- Karnataka (22%)
- Gujarat (17%)
- Delhi (13%)
- Tamil Nadu (5%).
Challenges in FDI policy:
- There has been a decline in the net FDI inflows as per cent of GDP.
- The share of Digital FDI—such as investments in computer services, telecommunications, consultancy services, and information and broadcasting—is higher compared to physical FDI in sectors like automobiles, pharmaceuticals, and construction.
- This shift contributes to increased volatility in FDI investment in India.
- A few years ago (FY14), physical FDI was about three times the value of digital FDI.
- Dilemma of whether to allow Chinese FDI or not as it can be used by Chinese against Indian security interests e.g. Huawei can target India’s critical telecom sector infrastructure.
- To curb opportunistic takeovers of Indian companies due to the Covid-19 pandemic, the government had amended the FDI policy under Press note (PN3) in 2020, which meant that the neighbouring countries, particularly China, could invest in India only after the government’s approval.
Way Forward:
- According to the Economic survey, PN3 as such is not being re-evaluated right now. But within the PN3 provisions, whether that process of approval through the government scrutiny route, if that can be speeded up, can always be seen.
- India has two options to benefit from China plus one strategy: integrate into China’s supply chain(which will increase trade deficit with China) or promote FDI from China.
- Focusing on FDI from China is more promising for boosting India’s exports to the US, similar to East Asian economies in the past. Given the growing trade deficit with China and the shift of US and European sourcing away from China, encouraging Chinese investment in India for export to these markets is more effective than importing from China and re-exporting.
- Nations like Mexico, Vietnam, Taiwan, and Korea were direct beneficiaries of the US’s trade diversion from China. Even while these nations increased their share of exports to the US, they also displayed a concomitant rise in Chinese FDI.
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“China Plus One” strategy
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