On Saturday, May 16, 2020, the Indian government announced landmark policy reforms in eight strategic sectors of the Indian economy. This was the fourth announcement in a series of five restructuring “phases” announced under India’s new US$266 billion stimulus package to provide economic relief to industries affected by the COVID-19 pandemic. The Finance Ministry provided bold new measures for the coal mining, mineral mining, power distribution, atomic energy, defense, civil aviation, space and social infrastructure sectors. Each new policy aims to spur business, employment and general growth in India’s ailing markets. This client alert summarizes the fundamental reforms made in each sector.
Natural resources and mining
The Indian government ended its long-standing monopoly on commercial coal mining. In India, mining rights are sold in “blocks” of a given geographic area. The purchaser of a mining block essentially buys the right to conduct mining operations within that block. Coal mining blocks range in size – some of the largest blocks can produce up to 50 million metric tons of coal per year. In 1973, all coal mining operations were nationalized in India. Prior to that time private sector mining was permitted. However beginning in 2015, captive, end-use consumers of coal were permitted to purchase mining blocks from the government by auction. These users were typically power and steel companies that mined coal only for their own consumption. Now, any business may purchase coal mining blocks and subsequently sell them on the open market. In conjunction, the Indian government will offer nearly 50 coal mining blocks for immediate auction. This relaxation introduces transparency and free-market competition into the coal sector. The Indian government separately announced its intention to spend nearly US$6.8 billion to build new coal evacuation infrastructure in the country. These reforms aim to reduce dependence on imported coal and to create a strong, self-reliant domestic energy sector.
The mineral mining industry has also had new reforms announced. The Indian government will auction 500 mineral mining blocks, including bundled tracts of bauxite and coal to facilitate the production of raw alumina and the generation of electricity to produce aluminum. The intent is to sell co-dependent raw materials in a package so that exploration, mining and production may take place seamlessly and efficiently by the purchaser business. This in turn serves to exploit India’s abundant reserves of raw minerals in order to elevate its position in the integrated metals sphere globally. The aluminum industry is particularly valuable to India’s economy, and has been identified as a key recipient of relief under the reforms. The Indian government also lifted restrictions on transfers of mining leases and the sales of surplus, unused minerals. Previously, owners of captive mines were subject to a blanket ban from transferring mining leases through any means other than auction. Now, captive and non-captive mines alike are treated without distinction and may be freely transferred through either private or public sale. This change will allow a higher volume of acquisition and disposition activity in the mining sector. The primary aim of these reforms is to raise the amount of private and foreign investment in the mineral sector to boost India’s economy.
The announcement also introduced privatizing measures for the power sector. Electricity distribution companies (DISCOMs) in the eight union territories of India will now become privatized through a competitive bidding process. A proposed new power tariff policy will provide novel measures that prioritize consumer rights and industry support. One key provision of the new tariff policy is the penalization of load shedding. Electricity distribution companies may no longer interrupt or shut down the supply of power, absent a technical failure or a natural disaster. The underlying theme of the policy is that power companies should not pass their inefficiencies or losses on to individual consumers. The Indian government aims to improve operational and financial efficiency in power distribution so that businesses retain stability and consistency amid the financial crisis caused by the COVID-19 pandemic. This intent proves consistent – in the first of the five announcements outlining the stimulus program, each DISCOM was promised a sum of cash to be credited against its amounts payable to the government-owned power producers that sell the electricity to the DISCOM from thermal, hydro and solar sources. This mitigation further demonstrates India’s commitment to keep companies in certain vital industries functional and operating.
Technology and manufacturing
India’s robust technology start-ups have become interested in the nuclear energy sector. The Indian government announced the establishment of research reactor facilities in which private technology businesses will partner with the government to conduct nuclear energy research. This public-private partnership (PPP) aims to stimulate economic relief by producing radioactive isotopes that affordably treat diseases and preserve large-scale agriculture, among other things. The reform serves a dual purpose of promoting public welfare associated with medicine and food as well as supporting the wide breadth of domestic technology entrepreneurs that contribute to India’s economic profile.
In an effort to spur domestic manufacturing in the defense industry, the Indian government announced a relaxation of restrictions for certain foreign direct investments in domestic defense companies. Previously, non-Indian investors could only invest or acquire up to 49 percent of the equity of an Indian defense manufacturing company before requiring government approval. The announced reform increases that limit to a 74 percent stake. This greater access to capital allows defense companies to exploit financial opportunities from a wider variety of investors. Moreover, the more lenient investment rules may encourage global defense conglomerates to establish permanent manufacturing and R&D hubs in India.
At the same time, the Indian government will also publish a list of weapons and accompanying parts that are banned from import and may only be purchased from domestic defense equipment manufacturers. These measures serve to strengthen the “Make in India” effort, a nationwide program that incentivizes the manufacture of products within the country. The defense manufacturing sector, in particular, comprises a significant portion of India’s gross domestic product, and officials believe that lowering the barriers to manufacturing, selling and purchasing defense products will both bolster the Indian economy and decrease dependence on imported products.
Aerospace
The civil aviation sector will also receive sweeping policy changes, though specific measures remain to be announced, which most observers believe will be, in part, aimed at aiding Indian airlines, which have been grounded by authorities since March due to the COVID-19 pandemic. The Indian government also announced its plan to lessen certain restrictions on air space utilization and to privatize six state-owned airports through PPP-structured auctions.
The Indian government also has announced additional reforms for the space industry. Private companies engaged in aerospace engineering, satellite operations, and rocket and other launch vehicle development will receive access to the Indian Space Research Organization’s facilities for the first time. In providing the right to use sophisticated government resources, the Finance Ministry emphasized its intent to provide a “level playing field” for the private sector in both the space industry and the domestic economy at large.
Infrastructure
Finally, social infrastructure projects throughout India will receive additional “viability gap funding.” Prior to its May 16 announcement, the Indian government was authorized to provide a one-time monetary contribution to an infrastructure project that is economically justified but not financially viable, capped at 20 percent of the project’s total cost. Now, social infrastructure efforts, specifically, may receive up to 30 percent of the project cost from the federal government. The intention is to attract private sector sponsors to support sustainable ventures that not only stimulate the economy but also provide beneficial community resources to the public.
Indian companies, their investors and their business counterparts should be aware of the government’s ongoing privatization trend, which has been accelerated by the COVID-19 pandemic. This latest stimulus package demonstrates India’s efforts to reform its economy to enhance its economic competitiveness. Industry groups should make efforts to monitor the government’s continuing developments and corresponding reactions of the affected businesses. As the announced reforms come into practical play, many Indian companies will experience periods of substantial business revitalization. For overseas companies and investors in particular, these reforms represent a significant opportunity to participate in the restarting of India’s economy.
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Client Alert 2020-322
