Indian shares and the rupee strengthened in morning trade yesterday after the government relaxed foreign investment rules in a host of sectors to boost sluggish growth and the ailing currency.
The rupee, which this year has been the worst performing currency among Asia’s major economies, rose to 59.26 against the US dollar from its previous close of 59.31, while the 30-share SENSEX was up 0.37 percent.
A group of Indian Cabinet ministers late on Tuesday cleared plans to remove the foreign investment cap in telecoms and relax overseas ownership rules in a host of sectors in a new economic reforms push.
The moves are aimed wooing investors and kickstarting the struggling economy before the scandal-tainted Congress government faces voters in general elections due by May next year.
“We expect more foreign direct investment to flow in with these decisions,” Indian Minister of Commerce and Industry Anand Sharma told an evening news conference.
The government is seeking to rebuild confidence in the economy that grew at its slowest pace in a decade at 5 percent and boost the ailing rupee, which has hit a string of lifetime lows in recent weeks.
Among the steps, the ministers at a meeting chaired by Indian Prime Minister Manmohan Singh approved raising the ceiling on foreign direct investment (FDI) in telecommunications from 74 percent to 100 percent.
They also decided to abolish the need for government approval for certain levels of foreign investment in single-brand retail and petroleum refining. In insurance, it approved raising the FDI cap from 26 percent to 49 percent.
However, in the contentious area of defense, the FDI cap will remain at 26 percent with proposals beyond that considered on a case-by-case basis.
The ministers’ decisions will still require the approval of the full Cabinet — likely to come at a meeting next week — and the move to hike the insurance cap requires parliamentary clearance, Sharma said.
The announcement came after Minister of Finance P. Chidambaram visited the US for a second time in three months last week to reassure foreign firms that India remained a hospitable place to invest.
“We welcome the move and it indicates that reforms are underway,” Federation of Chambers of Commerce and Industry president Naina Lal Kidwai said.
FDI in India — seen as vital to improving its shabby infrastructure and boost manufacturing to employ its burgeoning youth population plunged to US$22.4 billion last year from 36.5 the previous year, government figures show.
Underscoring foreign investor unhappiness with India, South Korean steel giant POSCO scrapped a US$5.3 billion deal to build a steel plant in the southern state of Karnataka due to land acquisition delays and local opposition.
“These measures, apart from boosting near-term sentiment, are medium-term positive as they will help attract stable long-term capital inflows,” said Sonal Varma, economist with Nomura Securities.
The government has been dogged by a string of graft scandals during its second term in office, which has derailed many of its efforts to push through promised pro-market reforms.
Last year, the government opened up the supermarket, civil aviation and broadcasting sectors to wider foreign investment in a burst of reforms after being accused of policy paralysis.