Towards a foreign investment policy

Does India really have a foreign investment policy? This, I believe is the question we need to ask, rather than worry whether the outburst against multinationals from Mr Tarun Das, director-general of the Confederation of Indian Industry, is a protectionist demand.

I moderated a TV discussion on the subject last week between a former CII president, Mr Subodh Bhargava, and the FICCI secretary-general, Dr Amit Mitra. Mr Bhargava said the issues raised by Mr Tarun Das were intended for bilateral discussion between Indian and foreign businessmen, and must not be interpreted as an appeal to the government to intervene. The CII favoured foreign investment, he said, and simply wanted better long-term business relationships between Indian and foreign businessmen, and this required improved behaviour from both.

So much for the alarmist interpretation of many newspapers. More important, both Mr Bhargava and Dr Mitra were critical of the lack of transparency on foreign investment conditions.

The government has liberalised foreign investment somewhat since 1991. Bu true liberalization means a rule-based system where anybody conforming to the rules can go ahead without hindrance. This is not the case in India.

In 34 industries, foreign equity of up to 51 per cent is automatically allowed. But in other industries, or for higher levels of equity, every foreign investment proposal has to go to the Foreign Investment Promotion Board (FIPB) for case-by- case approval (critics complain this is really suitcase-by-suitcase approval). Some foreign investors are cleared for a 25 per cent equity stake, some for 51 per cent, some for 100 per cent, all within the same industry. Nobody is certain what the government permits-you can get anything if you lobby hard enough.

But true liberalisation means a rule-based system where anybody conforming to the rules can go ahead without hindrance.

I have long argued in favour of pre-announced rules, with automatic clearance for anybody conforming to the rules. Case-by-case clearance is a recipe for delay and corruption and must be avoided. True, the FIPB is generally viewed as reasonably quick and efficient. But why have such a body at all? Why not have non-discretionary rules that end corruption and delays?

FICCI is researching foreign investment rules in other Asian countries, and will shortly be coming out with proposals for a set of rules in India. I think the finance ministry should carry out such an exercise itself.

Dr Amit Mitra has already suggested a three-part approach. He says multinationals should have a dominant role in infrastructure, a strong role in export production, and a supportive role in other areas. Cynics will say he is trying to protect his own clients. Infrastructure has traditionally been a public sector monopoly, so MNCs\’ dominance there does not threaten Indian businessmen. Nor does export production. But in other areas foreign companies will compete with local ones, and here FICCI wants them to play only a supportive role. However, there is a deeper logic in Dr Mitra\’s suggestion. The sums needed for infrastructure are so huge that Indian businessmen cannot fund them, telecom being a classic example. Dominant foreign investment is inevitable here.

My own approach is different. I think it is a mistake to place restrictions on a foreign investor at the outset. Indonesia has a better idea-it allows foreign investors to start with 100 per cent, but makes them dilute their stake in 15 to 20 years, down to 49 per cent in many cases.

We too should allow any foreign investor 100 per cent to begin with. A new business will remit few or no dividends in its first five years. But we should then have an incentive-based programme for equity reduction. Any company which exports more than 75 per cent of its output could be allowed to keep 100 percent equity, since it is using India s a global production center. A company which exports twice as much as it imports could be allowed 80 per cent equity. Companies which export as much as they import can be allowed 60 percent. Others can be asked to dilute to 51 percent within ten years, and further to 49 per cent within 20 years.

But if indeed the political class insists on restrictions, they should be based on clear rules not ministerial discretion.

A sliding scale like this provide carrots and sticks to induce the sort of behaviour we want. The whole point of liberalization is to marry cheap global capital with cheap Indian skills to produce a world-beating combination, and such world-beaters should be active exporters. Those that make profits based entirely on a protected domestic market must be asked to dilute their equity. I would make an exception only in the case of infrastructure, which is non-exportable.

Barring infrastructure, I see no need to have different rules for different sectors. The BJP and Left will disagree—they say foreign investment is acceptable in infrastructure and exports, but not in consumer goods.

I find the distinction untenable. It is surely stupid to let, say, Kellogs produce world-class consumer goods in India for export but forbid Indians to consume the same goods. Why deny our people what we do not deny others?

But if indeed the political class insists on restrictions, they should be based on clear rules, not ministerial discretion. For instance, the rules could permit future foreign investment in consumer goods only in the following: (1) In joint ventures, where the Indian partner has a stake of 51 per cent, as in telecom: (2) where the foreign company exports at least 51 per cent of its output.

I do not think these are ideal conditions. But at least they will constitute a rule-based foreign investment policy. That will be better than today’s case-by-case system, which is non-policy by another name.

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