Heavy Shower of Reforms?

Desperately seeking foreign investments, India faces a rainy metaphor

N Chandra Mohan Delhi 

With the onset of the monsoon, rainy metaphors abound in the media. ‘Heavy shower of reforms to drench FDI regime’ may be over the top but draws attention to the UPA government’s drive to attract more foreign direct investments. There is concern that such inflows are barely a drizzle to finance the ballooning imbalance in goods and services trade that has reached crisis proportions. India has also targetted $1 trillion of investments during the Twelfth Plan (2012-17) to build its roads, bridges, telecom, railways and power facilities, with half of it coming from private investors, including foreigners. 

According to Union Finance Minister P Chidambaram, the Indian economy can easily absorb $50 billion of FDI every year. Instead, equity inflows have declined by 36 per cent to $22.4 billion in 2012-13. Not a single dollar has come in after multi-brand retail was thrown open last September to Walmart, Tesco, Carrefour and others. In civil aviation, the largest FDI deal with West Asian carrier Etihad taking a 24 per cent stake in Jet Airways has triggered serious concerns in the Foreign Investment Promotion Board (FIPB), Ministry of Corporate Affairs and the Securities and Exchange Board of India (SEBI). 

To kick-start more proposals in multi-brand retail, the government in early June came out with “clarifications” on the policy. Whether the prospective 12-14 foreign multi-brand players derive the clarity to roll out their operations is a different matter. The biggest deal-breaker is still the uncertainty of different states having the option to open up multi-brand retail to foreign investment. And the opposition party, the BJP, has vowed to roll back FDI in retail if it is voted to power in various states and nationally in 2014. The prospect is for foreign retailers to take two to three years more to enter the Indian market, states CRISIL.  

The $379 million Jet-Etihad deal is also hardly a reason to uncork the bubbly. The deal, in fact, exemplifies the complete lack of strategic intent in civil aviation. National interest has been seriously compromised in the drive to throw open the sector to FDI. The substantial expansion of bilaterals or flying rights to Abu Dhabi that coincided with this deal will take away a big chunk of the traffic from airports like Mumbai, Delhi and Hyderabad. This deal hardly augurs well for the prospects of the national carrier, Air India, which will face a further erosion of its market share on the lucrative Gulf route.  

If the FDI policy in civil aviation was to ensure that ownership and control remain in Indian hands, the Jet-Etihad deal has undone all that in one stroke! With just a 24 per cent stake, control has effectively passed to Etihad whose say on the board equals that of Jet’s management. To be sure, the considerable clout of Jet’s promoter with the powers-that-be will be used to satisfy the concerns of the FIPB, corporate affairs ministry and SEBI, by ‘suitably’ amending the shareholders’ agreement. But there is no doubt as to who has the bigger influence in appointing a majority of directors and taking board decisions. 

Will such concerns about FDI disappear with the ‘heavy shower of reforms’ being planned by the UPA government? It is planning to further liberalize the FDI regime by raising the caps, for instance, on multi-brand retail from 51 per cent to 74 per cent and in airlines from 49 per cent to 100 per cent. The limits are likely to be raised to 100 per cent also for telecom. The caps might be raised to 49 per cent in sectors like defence, where they are currently limited to 26 per cent, and mandatory FIPB clearances done away with. Doing so for insurance and pension funds, however, requires legislative amendments.  

Raising caps on FDI and liberalizing the regime per se is unlikely to enthuse foreign investors. If FDI hasn’t come in so far with a cap of 51 per cent in multi-brand retail, will raising it to 74 per cent make a world of difference? Instead of such cosmetic reforms, the Indian economy will be much better served if the government exhibits greater strategic intent in inviting FDI. FDI is welcome — not just to bridge the current account deficit — but also if it augments productive capacities, upgrades the Indian economy technologically and leads to employment generation. It must help build our infrastructure. 

How much of such development-oriented FDI has India attracted?

Very little indeed! A joint publication of the Institute for Studies in Industrial Development (ISID), “India’s FDI Inflows: Trends and Concepts”, studied 2,748 cases of foreign equity inflows, each accounting for at least $5 million, from September 2004 to December 2009. Development-oriented FDI that could add to existing manufacturing capacities constituted only 10 per cent of the total reported inflows. In general, development-oriented FDI accounted for only 36 per cent of the total inflows of $81 billion covered by the 2,748 cases in to the study.  

The $379 million Jet-Etihad deal is hardly a reason to uncork the bubbly. The deal exemplifies the complete lack of strategic intent in civil aviation. National interest has been seriously compromised in the drive to throw open the sector to FDI 

Approving more of such FDI ought to engage the government’s attention, if the economy is to return to a fast growth trajectory. It is a no-brainer that you badly require more steel for a rapidly expanding economy. Does it then make sense to let additional capacities, both domestic and foreign, remain on paper for years without clearances? The lapsed MoU for the largest big-ticket FDI deal from South Korea to build a 12 million tonne steel plant in the port town of Paradip in the eastern state of Odisha has not even been renewed! Even Tata faced inordinate delays in clearances for a steel project.

More FDI to contribute to the $1 trillion planned investment in infrastructure must be fast-tracked. India’s warming relationship with Japan offers a wonderful window of opportunity that must be seized. But are we ready for this? Not quite, if the president of the Japan International Cooperation Agency has to urge the finance minister to speed up project approvals! 

The late economist, IG Patel, in several of his writings admitted that it was a huge mistake when we did not understand the vast potential of Japan and open our doors to investments from that country during the 1950s and early 1960s. India then had an excellent relationship as we were among the few countries that did not ask for reparations. Politically also we were at the highest rating as far as Japan was concerned. 

Having missed the bus then, the billion yen question is whether we can seize another ‘Japan moment’, especially under the leadership of Shinzo Abe, to borrow an expression of former foreign secretary Shyam Saran. “In the case of Japan we need to put in place a congenial policy framework to attract large-scale capital investment. If we continue to be ambivalent towards foreign capital and persist with an unpredictable regulatory and tax regime, this window of opportunity will close,” he argued. 

A ‘heavy shower of reforms’ clearly is no substitute for greater purposiveness in seeking FDI. This, together with long standing improvements in the business environment and regulations, will be far more efficacious to get the right sort of foreign direct investments that will truly help us develop by building our infrastructure and return to a eight to nine per cent growth rate.   

This story is from the print issue of Hardnews: JULY 2013