On April 1, the government came out with a comprehensive document detailing for the first time in one place all its various policy provisions pertaining to foreign direct investment (FDI) in the country. Laudable as it was, the exercise lent clarity to the entire gamut of FDI policy issues. It also created a semblance of stability on the government’s FDI policy front as it promised a review of the policy only twice a year. In other words, the next review of the policy was expected to take place on October 1. For foreign investors, this was a welcome relief as they could at least keep a six-month horizon in mind while they planned their projects in India in the secure thought that no sudden policy shifts would take place in this period. How naive they were must have dawned on them on April 7, when the Union Cabinet Committee on Economic Affairs, the government’s highest economic policy-making body, decided to ban all new foreign direct investment in cigarettes. The comprehensive FDI policy document, announced and made effective just a week before that, had allowed 100 per cent foreign direct investment in tobacco, including cigarettes, after prior permission of the Foreign Investment Promotion Board. While the government’s logic in disallowing fresh FDI in cigarettes may have been consistent with its commitment to reduce tobacco consumption and its overall concern for the health of its people, what certainly defies norms of good governance is the manner in which the sanctity of its own policy document was violated so soon after its enforcement.
Indeed, the two weeks since the publication of the FDI policy document have seen a fresh momentum to inter-ministerial consultation over further policy changes in key areas. The proposed changes include issues such as downstream investments by companies with less than 50 per cent foreign equity, exclusion of portfolio investments by foreign institutional investors while calculating the overall FDI limit, restrictions on sales by wholesale trading companies with foreign equity (or the cash-and-carry outfits) and raising the 26 per cent cap on foreign investment in defence units. A charitable view of the astonishing pace at which these consultations are taking place would be to justify these moves as part of the government’s eagerness to be ready with the next round of review of the FDI policy to be enforced from October. However, it is obvious that the changes now under study are of a fundamental nature and the government may have needlessly rushed with a comprehensive FDI policy document in April without first plugging what clearly were glaring loopholes in the policy. By allowing companies with less than 50 per cent foreign equity to invest in any company which could then set up a project in any area irrespective of its FDI cap, the government had only allowed back-door entry of foreign investors in restricted areas. That the government now wishes to plug this loophole is a welcome move. Similarly, excluding foreign portfolio investments while calculating the foreign investment levels in a company is a pragmatic move as indeed portfolio investments should not be treated on a par with foreign direct investment. Raising the FDI cap in defence units beyond the existing level of 26 per cent has strategic implications. Therefore, a further relaxation in the FDI restrictions in this sector must bear in mind whether the change in policy would undermine the research and development efforts of the country’s domestic defence units.
These deliberations make it clear that even after the formulation of a comprehensive FDI policy document, the government’s approach to foreign investment in many areas requires greater and more broad-based consultation. If indeed the goal and the corollary benefits of a six-monthly review of the FDI policy are to be achieved, it is time the government thought of a permanent inter-ministerial body that continually evaluated policy changes that needed to be made and announced twice a year. This would obviate the need for making periodic and often abrupt as well as ad hoc changes whenever the industry ministry thinks it can prepare a fresh press note.
