The Hindu : Business : More than a trade-off

Online edition of India's National Newspaper
Monday, Feb 07, 2005

Business

Business

More than a trade-off

Neither of the two decisions should be fitted into neat watertight compartments representing the reform and anti-reform agendas. The decisions are above all pragmatic in the given circumstances.

TWO DECISIONS announced by the Government on Wednesday last seem to support and question its reform credentials simultaneously.

The decision to hike the foreign direct investment (FDI) limit in telecom sector to 74 per cent from the existing 49 per cent has been welcomed not just by the industry. The second decision had to do with the interest rate on the Employees' Provident Fund. It has been raised to 9.5 per cent, a full percentage point higher than the interim 8.5 per cent fixed for 2004-05 and with retrospective effect from. There were all round expectations that the Government, having decided on this move months ago, was merely waiting for the right moment to announce it.

Inevitably it is the timing of the decisions — with both being approved and announced simultaneously — that has become the focal point of all discussions. That the two decisions have their supporters and detractors is well known but it is important to note that arguments for and against the decisions have not necessarily been confined to one or the other side of the ideological divide.

Telecom FDI hike

The telecom sector's further opening up to FDI has been hailed as a "big bang'' reform. There are many who had believed that the Government should announce a "bold" decision on reform if only to send the correct signals.

In any case, increasing the FDI cap in the telecom sector was a promise made in the UPA Government's budget of July 2004. Moreover, the sector has witnessed phenomenal growth and is in need of huge funds for expansion and consolidation. A working group has estimated the fund requirements to be of the order of Rs. 160,000 crores during the Tenth Plan alone. The argument for opening up the FDI route primarily from the funding angle has been strong though security considerations were also cited to stall the move.

In fact, many "pro-reformers'' had joined the Left parties in opposing the FDI ceiling hike basing their arguments entirely (unlike the political parties which had ideological reasons too) on security issues.

The Government has tried to address those concerns in its new policy. Majority of directors including the MD and CEO of a telecom company as also certain key personnel will have to be resident Indians; at least one resident Indian group should hold a minimum 10 per cent of the company's equity. The latter stipulation will ensure that there will be an identifiable promoter group. Further, traffic within India should not be routed outside the country. As for specific concerns voiced by the intelligence agencies and police departments, it has been laid down that the telephone companies should ensure that the identity of subscribers can be traced at all times.

It is not clear whether all the security concerns have been met in the latest decision. On the other side, there are arguments that the Government (while laying down those conditions) may be discouraging FDI flows.

Meanwhile, barely days after the announcement to hike the FDI limit, the telecom sector is abuzz with activity. Reports of deal making are there in plenty, as the industry looks certain to consolidate.

One beneficial outcome will be greater transparency in the shareholding structure of the telecom companies.

From now on, it will be the telecom policy and regulation that will determine the success of the FDI relaxation. There are a number of pending issues such as those relating to access deficit charges, rural telephony and universal service obligations and above all an enormous backlog of litigation.

Higher interest on EPF

The decision to hike the EPF rate is considered part of the trade off with political parties opposed to the telecom liberalisation. Such reasoning may be too simplistic. For one, it is not clear whether such a give and take policy is possible in two distinct areas.

Even if there has been a trade off, it is difficult to determine the winners and losers. Has the Government given away too much in return for the political parties' support for the FDI relaxation? There will never be easy answers.

C. R. L. Narasimhan

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