India Technology Products

India has dropped a rule banning private companies from buying electronics that weren't at least partly made in India.

The rule—which will still apply to government purchases—could have delayed or derailed expansion plans by global telecommunication and technology companies, which have long been among the biggest investors in Asia's third-largest economy.

While India officially changed its so-called Buy Indian policy last month, it didn't announce the change until Monday. "The policy was approved in the month of December by the cabinet finally," said J. Satyanarayana, federal secretary at the Department of Electronics and Information Technology.

Critics said the sudden restrictions on how companies buy their electronics, first announced in February 2012, were unfeasible as India doesn't have the manufacturing capability to build all the computers, cellular network equipment and printers it needs as its economy expands.

"Until the market reaches a scale, manufacturing of electronics locally is going to be a challenge," said Jaideep Mehta, the New Delhi-based country manager at technology research company International Data Corp. "The end user ends up paying a higher cost for the technology and that would dissuade people from adopting technology."

The announcement is the latest sign that as emerging markets fall out of favor with global investors and executives, New Delhi is feeling the pressure to open its markets more to attract the international capital it needs to jump start the economy.

India's gross-domestic-product growth slipped to a decade low of 5% in the year ended in March and is expected to be 5% or lower this fiscal year. While it used to be one of the world's hottest markets, India must now work harder to persuade companies and investors to park their cash there. It needs more foreign funds to help expand its economy, create employment and build its infrastructure.

In November, the country retreated from another restriction when it decided to drop a proposal to limit foreign investment in pharmaceutical companies. New Delhi announced earlier this month that it is considering allowing foreign investment in Internet retailers that sell products directly to consumers.

India has announced a number of measures in the past 18 months aimed at bringing in long-term foreign investment to help finance its current-account deficit. In July, it decided to allow full foreign ownership in telecommunication companies and supermarket chains for the first time.

India's decision to drop the "buy Indian" rules comes after global and local executives said that many of the electronic goods crucial to India's growth aren't currently made in India.

New Delhi unveiled its plan to implement what it called the "Preferential Market Access" rules two years ago, mandating government departments to buy domestically. The new rules were aimed at increasing security, shrinking India's trade deficit and boosting local manufacturing. It later expanded the policy to include private companies.

The Buy Indian requirement said that electronics purchased in India must include locally made components accounting for at least 30% of the total value of the product. That figure would be lifted to 100% by 2020. For information-technology-related products such as computers and printers, the local content requirement was to start at 25% and be raised to 45% within five years.

After industry lobbying groups and governments from around the world protested India's plans, the Prime Minister's Office asked the Department of Electronics and Information Technology to amend the policy last July.

Last month, the cabinet decided to scrap the rules for private procurement and let the restrictions remain on government purchases.

Local electronics manufacturers said they still need protection. The India Electronics & Semiconductor Association said that the government's decision will exacerbate the country's trade imbalance as it would encourage imports and don't provide any motivation to build domestic manufacturing capacity.

"Such policy shifts can jeopardize further investments into the sector," PVG. Menon, president of the association, said.