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| The new foreign investment guideline is the most far-reaching opening up from the present govt | | Business Standard / New Delhi February 13, 2009, 0:21 IST | |
The government’s new guidelines on foreign investment, announced on Wednesday and with details to follow in about 10 days, will open the door significantly for foreign investment into the country. The effect of the new guidelines will be to allow indirect (and therefore de facto) foreign direct investment (FDI) in sectors that have so far been closed to it—including multi-brand retail. It also stipulates a uniform limit of 49 per cent on foreign investment in sectors other than insurance, thus opening the window wider for sectors that have so far lived with a 26 per cent limit. There is no doubt that this is the most far-reaching opening up that has been done by this government. It is curious therefore that this should be done at the fag end of its term, barely a fortnight before the announcement of fresh elections puts a bar on such policy pronouncements. Critics will also question the propriety of reform by sleight of hand, in that definitional loopholes are being used to change foreign investment rules by executive order, with regard to sectors that have long been the subject of political controversy. But the manner and timing of the decision are side issues, and not of great consequence in the final analysis. The real issue is the wisdom of what is sought to be done.
Here, the view has to be that the changes are to be welcomed. Shutting out FDI in multi-brand retail and other such sectors was always an irrational position to adopt. If this has now been allowed by Indian-controlled firms (ie firms that have majority Indian shareholding), the de facto cap on the investing as well as the downstream firm is 49 per cent. Having some uniformity of rules across sectors is also to be welcomed, because there was no particular logic to allowing 49 per cent in one sector, 26 per cent in a second, and 20 per cent in a third. Even the raising of the cap from 26 per cent to 49 per cent is not significant from the viewpoint of company law, although there is a significant difference in terms of beneficial ownership. The question-mark has to be over the issue of Indian vs foreign control, and whether the definitions and concepts used by the government to determine this are foolproof. In other words, can the 49 per cent limit be circumvented, and lead to foreign investment that in fact exceeds the stated limit? There is the danger that it can, and so the rules for giving effect to the policy will have to be framed very carefully.
Not much money should be expected by way of inflow in the short-term future because (as one report forecasts) there will be an 80 per cent reduction this year in private, cross-country capital flows this year. However, to the extent that India remains an attractive story with a GDP growth rate that is 6-7 percentage points higher than the global average, through good and bad years, more foreign investment into the country is what should be expected once the global economy returns to normalcy.
What is not clear from Wednesday’s announcement is whether the recommendation on clubbing FDI and foreign institutional investment (FII) limits in one basket, has been accepted by the Cabinet. These have been separate windows until now for most sectors (barring exceptions like the media), and with good reason, because the objectives and nature of FDI and FII investment have been different—with regard to the time frame for investment, desire for management control, and the like. That there are stray cases where FDI money may have come in under the guise of FII investment (through participatory notes and other methods, in order to circumvent FDI limits), is not a good enough reason to do away with the differential treatment. So it must be hoped that FDI and FII money continue to remain in different baskets.
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