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S. Majumder

THOSE who expected the Finance Minister, Mr Jaswant Singh, to relax the sectoral caps on the FDI as recommended by the Planning Commission's Steering Group Report were disappointed. Whether a Budget can tinker with the FDI policy is a matter of debate. Effective changes in the FDI policy depend on the domestic investment environment and the global outlook.

In such a situation, Mr Jaswant Singh's "wait and watch" policy may well pay off.

A war in the Gulf, drought in most States, and a slump in domestic demand have affected investment confidence. The Economic Survey, which generally notes the perils facing the economy, was opaque. It delved more on the economy's resilience than on the steps needed to revive the growth rate. The FDI-GDP ratio is abysmally low in India — that is, 0.7 per cent — compared to 4-5 per cent for China, Thailand and Malaysia. Even so, FDI and the FII play a crucial role in the investment climate.

This led to the belief that relaxing the sectoral caps will not only increase FDI flow but also boost the domestic investors' sentiment.

Conversely, experience shows that the FDI cap relaxations have seldom had the expected results. Opening up of the insurance sector, raising the limit in banking, and permitting 100 per cent FDI in almost all manufacturing sectors have not exactly opened FDI gates.

In the first year of opening the insurance sector to foreign investment, the FDI approved was only Rs 317.3 crore and dropped to Rs 116.3 crore in the second. The FDI cap in banking — which was raised from 20 per cent to 40 per cent in May 2001 — could garner only Rs 27 crore worth in the same year and Rs 97.6 crore in the first seven months of 2002-03. The other notable examples of unimpressive results of FDI cap relaxations are oil refineries and township development. None of the FDI-approved projects in oil refinery has taken shape so far. Similarly, only one project has been approved after 100 per cent FDI was permitted in township development in May 2001.

What prevents foreign investors from coming to India? The fundamental problem lies in the various regulatory measures and the state monopolies. Relaxations in the foreign equity ceilings were appealing at the initial stage of reforms.

But later the cumbersome procedures and red-tape proved exasperating. In fact, the FIPB approval is no more a major detriment to the foreign investors.

It assures time-bound approval with simple procedures. The problem lies with the complex regulations and the frequent changes in the regulatory measures required after the FIPB approval is obtained.

Every service sector that offers high market potential to the foreign investor is governed by different regulatory measures and a separate body monitors them. Sectors such as banking, insurance, broadcasting, knowledge services, telecommunications, and township development provide a huge potential to the foreign investors.

Independent foreign equity ceiling and a separate set of regulations guide each sector. In most cases they are complicated and frequent changes have made them non-transparent. For instance, take the case of telecommunications. The policy for the sector has been changed twice — first in 1994 and again in 1999.

Though state monopoly has been done away with, it continues to exist in many sectors and is a major detriment to the FDI flows.

For instance, petroleum refineries have good potential, and 100 per cent FDI has been allowed in this segment. However, the initiative to invest has been curbed by the state monopolies.

Technically, controls over pricing and distribution of petro-products were done away with the dismantling of APM in April 1, 2002. But the Government continues to control prices as PSUs produce 80 per cent of the petro-products.

In sum, can only the removal or relaxations on the FDI cap prop up the foreign investment in the country? Relaxations in FDI cap are only procedural simplifications and no major allure for foreign investors. The main attraction of India should be the competitive edge it can offer.

Several countries have relaxed restrictions on services since the Asian crisis. For instance, Singapore abolished the ceiling on FDI in insurance and communication; Indonesia revised its negative list for foreign investors; Philippines opened its banking and retail sectors to foreign capital, and Thailand reduced the number of industries closed to foreign investment. The global FDI trend is constantly changing and India has to keep pace with it.

(The author is senior researcher in a New Delhi-based Japanese multinational firm.)

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