Time for sunset

NOCs for FDI partners should go

The government of India’s Department of Industrial Policy and Promotion has initiated a public discussion on whether the existing policy of a foreign partner of a joint venture needing a no objection certificate (NOC) from its Indian partner to venture out on its own should be done away with. This is an old measure which has stood in the way of liberalising and easing the process of foreign direct investment (FDI) entering India. While there may have been some justification in adopting the measure earlier, there is little sense in continuing with it a good 20 years after liberalisation started. To do so will mean continuing with a provision which allows some to play the role of door keeper and earn a rent income without any justification. The interests of incumbent Indian capital have stood in the way of putting in place an increasingly more friendly FDI regime in India. This, along with regular easing of the rules for portfolio investment, has created a degree of lopsidedness when the door should have been opened more widely for FDI which essentially comes to stay, as opposed to the more volatile form of investment via the stock market.

In policy, what is done for the present is often as important as what signal is given on what is likely to be done in the future. This allows continuity and predictability in the policy regime and builds confidence among potential investors to make long-term investment plans. The earlier government decision to do away with the need for an NOC for ventures which got going from 2005 did right to limit the future size of the problem (no more investment could be added to the pool that required an NOC) as also convey the signal that this measure should be on its way out. There are several reasons now to go further down the same road. Any venture should not only pay back the promoter what she has invested in it in reasonable time, continued and indefinite dependence on foreign knowhow is hardly to be encouraged. A manufacturer, who has started off with licensed knowhow that came with a foreign equity stake, should in good time absorb the knowhow and be in a position to take the technology forward on its own. What is more, India is pursuing with increasing seriousness bilateral and regional trade agreements with the rest of Asia which is likely to allow freer entry of finished products over time. If, simultaneously, entry barriers to investment remain, a day will come when those who could not get in to put up plants on their own will happily ship in the finished product through a lowering tariff wall. This will merely raise landed costs of products when firms from all over the world are coming to India to set up plants to take advantage of its low cost environment. The least that should be done by the government is to announce right now a clear sunset, a future date by when the measure will go, and also start negotiations with the affected interests to try and bring forward that date. This will make the policy both gradual and predictable.