More liberalisation

THE FRESH CHANGES that the Government has announced in the rules for foreign direct investment (FDI) in specific sectors are not going to result in a dramatic increase in new outlays in these areas. What has so far held back FDI inflows in, for example, the power and petroleum sectors is not the presence of ceilings on foreign investment but the absence of prior reform in the domestic market. In the one piece of substantive deregulation that has been announced - the abolition of the rules on dividend balancing - there is sufficient reason to ask if this liberalisation was truly necessary at this stage.

In the past few years, the economy has been witness to a declining inflow of FDI even as external capital receipts as a whole have been increasing. New FDI in the previous financial year was just over half of the peak reached in 1998-99, even as actual inflows as a proportion of the value of approvals remained less than 40 per cent. To reverse this trend the Government has been carrying out many changes in the FDI policy regime. Earlier this year, it expanded the scope of the automatic approval route through the RBI and thereby all but abolished the need for prospective investors in most sectors to clear their proposals with the Foreign Investment Promotion Board. And now the Union Cabinet has made further changes in the FDI rules. The focus is on accelerating FDI in the infrastructure sector, specifically power and petroleum refining. However, the power sector, where the Government initially wooed the foreign investor, has had a sorry experience with the ``fast track'' process which will soon be almost a decade old. If there is a lesson to be drawn from the record of the limited FDI that has taken place in the power sector it is that a local revamp must precede foreign entry. Since reform of the electricity sector is far from complete it is difficult to see how the removal of a ceiling of Rs. 1,500 crores on 100 per cent foreign investment will make a difference to capacity additions in electricity generation, transmission and distribution. A similar outcome awaits the removal of the 49 per cent ceiling on FDI in petroleum refining and marketing. With the presence of a moderate surplus in domestic refining capacity and a continuation of the administrative price mechanism in the retail sale of petroleum products, no dramatic entries can be expected from the multinational oil companies, a quarter of a century after they were forced to exit from this sector. The only true liberalisation in new FDI that has been decided upon is the permission for establishment of wholly-owned Internet ventures that will engage in business-to-business (B2B) sales.

In the first flush of deregulation in 1991, the Government of the time had imposed a requirement on foreign ventures in 22 consumer goods industries that dividend repatriation had to be balanced by exports/additional inflows. The intention was to contain outflows from ``non-essential'' projects, since it was known that few of these ventures would take exports seriously. The Government has now abolished the rule on balancing dividends. It is a fact that this regulation was in violation of the WTO agreement on trade- related investment measures (TRIMs) which was to come into force last January. But India and other developing countries had asked for an extension in the implementation period of the TRIMs agreement, an issue which was left unresolved amidst the wreckage at Seattle last year. Since there is now a tacit agreement among the members of the WTO not to immediately push for strict adherence to the TRIMs agreement, there was really no need for the Government to immediately address the complaints of foreign investors, especially if the dividend outflows are a small amount every year. The rule served, albeit imperfectly, as a mechanism to indirectly push FDI away from the domestic market and towards exports.

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Section  : Opinion
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