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Facilitating FDI
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The report of the Steering Committee on foreign direct investment submitted by the N. K. Singh committee is an excellent one and suggests comprehensive reforms to continue the liberalisation process undertaken by different governments since 1991, says Abhijit Roy.
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IN AUGUST 2001, the Planning Commission constituted a Steering Committee on Foreign Direct Investment (FDI), which had 12 members and was headed by N. K. Singh, Member, Planning Commission. The other members were drawn from various Central and State governments, the Reserve Bank of India and industry associations. The terms of reference of the committee included:
* To suggest policy and governance reforms necessary for attracting private investment, both domestic and foreign;
* To identify factors which inhibit higher FDI flows and suggest remedial steps;
* To examine policy reforms towards mergers and acquisitions for attracting FDI;
* To suggest changes in institutional apparatus and organisations in Centre and States for attracting FDI flows;
* To examine the factors responsible for the success of other countries like China in attracting FDI and make suitable recommendations based on the experience of other successful countries.
Recommendations
The committee in its detailed report submitted recently has come out with wide-ranging recommendations on a whole host of issues relating to FDI. While arriving at the suggestions, the committee sought the views of government departments, leading consultancy firms and representatives from chambers of commerce and industry. Some of the important recommendations contained in the report are provided here.
* Consider the enactment of a Foreign Investment Promotion Law that incorporates and integrates aspects relevant to promotion of FDI. The Department of Industrial Policy and Promotion should administer this law as against the present administration of the Foreign Exchange Management Act (FEMA) by the Directorate of Enforcement. This will be in line with the approach that the activity of encouraging FDI should be a promotional one rather than a regulatory one.
* States should enact a special investment law relating to infrastructure to expedite all investments in infrastructure sectors. The purpose of this law should be to integrate, to the extent feasible, the various State laws, rules and regulations applicable to infrastructure sectors. Areas such as environmental clearances, industrial relations and worker health could be covered under such an enactment. The committee has suggested that the Andhra Pradesh Infrastructure Act could be used as a reference.
* Empower the Foreign Investment Promotion Board (FIPB) to give initial Central level registrations and approvals where possible, with a view to speeding up the process of project implementation.
* Change Government's Rules of Business to empower Foreign Investment Implementation Authority (FIIA) to expedite the processing of administrative and policy approvals.
* The aggregate FDI target for the Tenth Plan should be disaggregated in terms of sectors and relevant administrative ministries/departments to increase accountability. The committee feels that if an annual FDI inflow target of $8 billion is to be achieved over the next five years, then such targets need to be set. The report also contains an indicative list of target amounts that could be set for various sectors. This, of course, assumes that a carrot and stick approach can be implemented!
* Sectoral FDI caps should be reduced to a minimum and entry barriers eliminated. This is discussed further below.
* The committee has also recommended that a number of exit barriers to FDI investors should be removed. This includes sale of shares by one foreigner to another foreigner, sale from non-resident to resident, the rule that premium on publicly listed share price cannot exceed 25 per cent and rules regarding minimum sale price in the case of unlisted companies.
* The existing strategy for attracting FDI should be overhauled. The emphasis should shift from a broad (scatter shot) approach to one of targeting specific companies in specific sectors. The Foreign Investment Promotion Council (FIPC) should be reformed to implement this strategy. Modern marketing techniques need to be used to attract FDI.
* The special economic zones (SPZs) should be developed as the most competitive destination for export related FDI in the world by simplifying applicable laws, rules and administrative procedures and reducing red tape to the levels found in China.
* Domestic policy reforms in the power, urban infrastructure and real estate sectors and decontrol/delicensing should be expedited to promote private domestic and foreign investment.
The committee has suggested a number of changes in present sectoral limits on FDI. The changes suggested in some of the important areas are provided in the accompanying Table.
Some comments on the above are in order:
* The committee has recommended that up to 100 per cent foreign equity in petroleum refining — PSEs as well as oil marketing should be allowed on automatic route. We have recently seen the brouhaha created over the proposed BPCL/HPCL privatisation. The Steering Committee proposes and the Minister disposes!
* In the case of civil aviation, the committee has proposed that foreign airlines should be allowed to hold up to 49 per cent equity in domestic airlines. This issue has generated a lot of heat in the past.
* In the case of basic and mobile telephone operations, foreign companies in a number of cases have contributed more than 49 per cent equity by using innovative structures. The proposed enhancement will only serve to regularise the situation.
* The insurance sector requires heavy investments, especially in the life insurance sector. In fact the suggested enhancement up to 49 per cent foreign equity may not be sufficient to fund Indian insurance JVs in a number of cases.
* The committee is of the opinion that liberalisation of investment norms in the real estate and housing sector will attract considerable amounts of FDI, as demonstrated by developments in other countries.
* The committee has recommended that non-retail trade should be opened up for FDI. However, the existing ban on FDI in retail trade should continue, as the retail sector in India is dispersed, labour intensive and disorganised.
Why it is important to change the mind set
India's share in FDI inflows among developing countries has been varying between one per cent and 2 per cent. This is indeed paltry. During 2001-02 FDI inflows did show improvement as it grew by 65 per cent over the previous year. Even with this improvement, FDI contributes too little to capital formation in the country. FDI as a percentage of total gross domestic product (GDP) was only 0.9 per cent in 2001. Among leading developing countries, this is the lowest in the world.
We are all aware that FDI flows into India are low. The irony of the situation is that India has a liberal and quite transparent FDI regime. As pointed out in the report, the entry rules are well defined and equity limits on foreign investment in certain sectors are explicit. India basically loses out at the altar of India's red tape and the hurdles of doing business in India. This is also responsible for the low levels of realisation of FDI flows compared to the proposals cleared. Delays also lead to time and cost overruns. Even though many foreign companies are attracted towards India, a large number of them reject India as a possible destination as the market for many products is not sufficiently large enough at present to merit the extra effort required to implement the project.
It is true that policy measures and bureaucratic non-cooperation contribute to the meagre FDI inflows and other countries have overtaken us. However, it is also true that the ordinary citizen has an ambivalent approach to FDI. The fear of the MNC (the East India company syndrome) does exist. The middle class householder wants competition in industry, he wants access to the best goods available abroad, he wants his son to be educated in the U.S., he wants his daughter to work in a call centre, but he does not want to accept the logical conclusion that globalisation means that we have to get used to foreign companies operating in India. Perhaps when the political — bureaucratic establishment is convinced that the ordinary citizen has started welcoming foreign players will we witness a significant increase in FDI flows.
Ovarall, the report submitted by the committee is an excellent one and suggests comprehensive reforms to continue the liberalisation process undertaken by different governments since 1991. In fact a few of the suggestions are quite radical. In the final analysis, the efficacy of the report will be judged by the implementation of its recommendations, and given the present political compulsions one can at best expect only a partial acceptance of its recommendations by the Government.
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