The Hindu : National : Telecom: `no need to raise FDI cap'

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Saturday, Nov 13, 2004

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National

Telecom: `no need to raise FDI cap'

By Sandeep Dikshit

NEW DELHI, NOV. 12. The Left parties, in their second note to the Government on the move to raise the cap on foreign direct investment (FDI) in telecom, have said that this issue has little relevance to the key issues in the telecom sector. "The urgent need is to expand the network coverage and extend rural telephony. Private players have very little contribution in both. Therefore, the issue of raising the FDI limit has little relevance to the key issues of improving coverage and rural telephony."

"Experience shows that blind faith in the market, coupled with relaxing the FDI limit will not lead to increased telecom penetration or expand telecom manufacturing base. The key here is not FDI limit but the cost of services and the thrust that the Government is willing to put into these sectors," said the note. Appreciating the Finance Ministry's reply to the first note, the second one said that while the reply takes up the general case in favour of lifting the FDI limit, it does not address the issue of violations of the existing limit by certain Indian and foreign companies.

Without this, the lifting of the limits would be construed as rewarding those who violated the law and send a wrong message.

Key question

The Left parties felt the key question is whether telecom is a strategic sector. The problem with not treating telecom as a strategic sector is that it does not match the reality — physical and other non-physical barriers to foreign entry in the telecom sector still exist in many advanced countries. Even the Indian security agencies have already put forward their positions that the telecom sector is strategic and foreign control of telecom companies need to be carefully circumscribed. Countries such as China, Mexico, Turkey and Malaysia, who are all in a similar stage of development, have restrictions on FDI, similar or more stringent than India's.

On the Finance Ministry's observation that China has "thrown open the doors to foreign capital," the Left note said China was yet to allow the FDI limit of 49 per cent but had over 30 crore subscribers, compared to 4.5 crores in India. Attracting foreign capital depends on market demand, the regulatory framework and a stable policy environment. These are the areas that India should address.

Internal resources

On the Ministry's claims that unless FDI limits are lifted huge investments cannot be made, the Left said internal resources generated by the telecom companies are adequate to meet the needs of the sector and the existing subscribers will pay for almost the entire future expansion of the network.

The Finance Ministry's note also implies that the telecom sector was financially weak and required more investments before loans could be raised. If the capital investments came largely from internal accruals, the debt: equity ratio was bound to be low; this was not an expression of the weakness of the sector but its strength.

"With the private sector concentrating on well-off consumers and high revenue urban areas, the rural-urban divide is getting even sharper: at present it stands at 1:11.

While improving teledensity is important, it is now becoming clear that unless immediate measures are taken, the urban-rural divide would continue to grow," observed the Left parties.

Reverse protection

The parties pointed out that India offered reverse protection in the Indian market — higher duties for raw materials than for finished goods, leading to the destruction of the indigenous telecom industry. The Chinese example was just the opposite. They have used their large internal market to develop one of the largest manufacturing bases in the world. The Finance Ministry calls it the "infant industry" model; but the fact is that this Chinese "infant" is currently the biggest player in the global cellular market.

The Left parties have also taken up the question of breaching of the FDI limit by Bharti and Hutch and called upon the Government to penalise them and ask them to align their foreign holdings with the 49 % FDI cap.

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