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Which Sectors Will Benefit from the FDI Reforms?

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Breaking down India’s FDI reforms

As discussed in the previous part of this series, the government of India has announced major FDI (foreign direct investment) reforms in 15 different sectors. The reforms are expected to boost foreign investment in major sectors including the construction, retail, defense, banking, agriculture, and aviation sectors.

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The reforms by sector

In the construction sector, the government has waived the requirements for minimum area and capitalization. This means that foreign investors can now invest in very small projects through the FDI route. Further, the defense sector is now open to as much as 49% of foreign investment through the automatic route. In the single brand retail sector, FDI is now much easier and smoother. Previously, 30% of the value of goods purchased had to be sourced locally from India. This rule has now been waived.

The realty sector has also received a big boost. The exit for foreign investment has been made easier with relaxed norms on the lock-in period. This improves overall investor sentiment, as investors gain from better liquidity.

The above chart shows the FDI equity inflow for the realty sector. The FDI inflow has been falling in the last three years. In the current fiscal year (April 2015 to March 2016), the FDI inflow was only $34 million as of June 2015.

India-focused mutual funds such as the Wasatch Emerging India Fund (WAINX) and the Eaton Vance Greater India Fund Class A (ETGIX) have their biggest exposure in the Indian financial sector. The top ten holdings of the ETGIX constitute large cap banking companies such as ICICI Bank (IBN). The funds also invest heavily in the technology sectors (INFY) (WIT).

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