Size of the deal no criterion for pharma FDI scrutiny

Written by Kirtika Suneja | KG Narendranath | Updated: Aug 5 2013, 06:10am hrs
A high current account deficit which could potentially grow further given the difficult external situation and a disturbing degree of volatility in the foreign exchange market have left the government with no choice but to resort to decisive policy action. Compressing certain kinds of imports especially those deemed as non-essential and a big push to exports are the obvious solutions to the high CAD. Promoting capital inflows especially of the non-debt-creating variety is imperative too, as there are concerns about how to safely finance the CAD, projected at $80 billion for 2013-14 by policymakers, and a good bit higher than that by some analysts. Last weeks Cabinet decisions liberalising the foreign investment policy concerning a host of sectors including multi-brand retail, telecom and defence were based on proposals put up by the department of industrial policy and promotion (DIPP), a wing of the ministry of commerce and industry. In an interview with FEs Kirtika Suneja and KG Narendranath, commerce and industry minister Anand Sharma expounds on the philosophy behind the Cabinet decisions and clarifies on certain aspects of the liberalisation. FDI is essential because domestic capital has limitations and the former can also facilitate technology transfer to Indian industry, the minister says, but defends his oft-articulated view that brownfield FDI in pharmaceuticals, though allowed up 100%, would need be scrutinised above the level of 49% for its potential to adversely impact certain production verticals like vaccines, injectables and anti-cancer drugs. The scrutiny criteria wont be size of the (takeover) deal (or that of the target Indian company), but the impact on these verticals, the minister explains. In Sharmas view, any curbs on imports (quantitative or by way of taxes) would have to imposed carefully. In areas where the difference between the bound tariffs (under the World Trade Organisation) and the actual level of duties (applied tariffs) is large, the latter could be hiked a bit, albeit selectively, he says. Edited excerpts:

How confident are you about the recent easing of FDI norms impacting inbound capital flows and making a difference to the FDI number for 2013-14 Last year, we saw a 38% decline in FDI flows $22.4 billion against $35 billion in the previous year and the question has really been about the overall investment climate in the country rather than a prohibitive FDI policy. You may be concerned that last month ArcelorMittal scrapped its plan to build a steel plant in Orissa and Posco also pulled out of its proposed Karnataka project, citing the delays in land clearances and uncertainty over iron ore supplies.

I cant quantify (the likely FDI flows in 2013-14) but the (liberalised) policy will do well (in attracting FDI). FDI has grown at over 24% in the June quarter.

As for the purported corporate decisions you mentioned, these are business discussions I am not privy to.

Anyway, Posco stage-one is ready for launch (in Orissa). When it comes to attracting FDI, the UPAs performance has been above par. From 2000 to 2013, $293 billion of FDI has come in, of which inflows of $267 billion were during our (UPA) period

Domestic investors have also been chary (as is reflected in the drop in investment rate).

We listen to investors both domestic and foreign. FDI brings not only capital but also technology and is required because domestic capital has limitations. Foreign capital is needed in addition to (and not in lieu of) domestic capital and complement each other.

The entry of domestic corporates in the organised retail has not destroyed the unorganised sector which still accounts for 96% of our retail trade.

Of the three major routes to get foreign investment FDI, FII and external commercial borrowing (ECB) FDI is the most preferred choice. While FII doesnt stay (long enough), the ECB is (about) debt creation. We are doing the best we can on our commitments on the reform agenda so as to accelerate inbound capital flows.

However, we cant ignore the backdrop of the (economic) downturn and the self-inflicted wounds of presumptive loss theory (of the Comptroller and Auditor General). Investors obviously have factored in (these observations) and decision-making has hence become tougher. These (CAG observations) have made the telecom spectrum unsaleable and reduced the auction revenue by 40%.

But your ministry has on several occasions batted for FDI curbs too. Why did you oppose the DEA (department of economic affairs) view that up to 49% FDI can be allowed through the automatic route

That suggestion (of the DEA) was not discussed in last weeks Cabinet meeting. Given the inherent factors and the philosophy behind the FDI policy, we couldnt have anyway made that change. Since there are conditions related to back-end infrastructure and sourcing (for multi-brand retail FDI), the proposals have to necessarily go through the FIPB (Foreign Investment Promotion Board) for scrutiny. We have assured flexibility as the demands (made by foreign retail giants) were justified and we have given more space and comfort to investors.

Will the changes in the FDI policy related to multi-brand retail trade require Parliament approval given that last September, the policy of 51% FDI in multi-brand retail was discussed and approved by Parliament and Foreign Exchange Management Act rules may be involved

We have not brought in any major policy change. The definition of medium enterprise is not the same as that of micro and small enterprises (mandatory sourcing from which was approved by the House). A new ceiling ($2 million investment in plant and machinery as against $1 million earlier) was put, but the definition of medium enterprise is not that. So we are not breaching any conditionality approved by Parliament.

The DIPP contends that sourcing cant be made preferable (as in the case of FDI in single-brand retail trade) for FDI investors in multi-brand retail as suggested by the DEA and insists on mandatory sourcing.

But we have said that the 50% investment requirement in back-end infrastructure would apply only for the initial (minimum) investment requirement of $100 million.

The idea is 30% of the sourcing is from the small and medium enterprises and farm cooperatives. In any case, there is no reluctance on the part of foreign investors when it comes to sourcing from Indian small-scale industry. In single-brand retail trade where 100% FDI is allowed, the actual domestic sourcing has been more than 90-95%. Nobody will buy grains, fruit and vegetables and milk from outside and bring it to India, which is one of the largest producers of these items. An investor also invests in the vendor in terms of marketing, human resources development and product development. If the SME does well as a result of the alliance, that should be welcomed and that is why we have now said the foreign investor can retain the vendors who outgrow the $2-million threshold. Those campaigners protesting against the policy are scaremongers.

Why do you want to regulate brownfield investments in pharmaceuticals Have you evidence that past FDI deals in the sector has hit the domestic industry and/or availability or affordability of medicines

FDI up to 100% is allowed both in greenfield and brownfield pharmaceutical ventures. Were only saying that in case of brownfield ventures, FDI above 49% would have to go through the FIPB route. When you are taking over control, verticals like anti-cancer drugs, vaccines and injectables could come under threat. India is currently a major producer of vaccines. Why should penicillin be imported from China (If FDI is allowed in these areas indiscriminately), prices will go up eventually in the long run.

More than the issue of pricing, it is rather a complex matter. Each case of brownfield FDI above 49% requires careful scrutiny. We may also look at if the investor who is taking over (an Indian firm) will add to the existing capacities of the firm and invest in R&D. By the way, the FIPB has recently cleared seven of the 10 pharma FDI proposals that came up before it, which means that we are not for blocking these FDI proposals.

Is the size of the takeover deal a criterion in this regard

Not exactly. Questions may be raised regarding certain critical production areas like vaccines and injectables and not over about the size of the takeover. We have to build on our robust generic drugs industry. You aye have noted that even the US is placing orders on India producers as that country has to bring down its healthcare costs.

Indias patenting criteria are said to be stringent.

Weve been giving patents. Our policies and laws are fully TRIPS-compliant in this regard. No one should expect India to be TRIPS-plus. India has always taken the judicial route, not executive one (when it comes to patenting). Even global bodies like WIPO (World Intellectual Property Organisation) have endorsed our patent laws.

Have you identified the non-essential items whose imports would be curbed as part of the plan to contain the current account deficit Is coal one item (whose imports would be curbed)

We should be mining our (large reserves of) domestic coal efficiently. The fuel supply agreements between Coal India and users are not being honoured and are mired in allegations. We import 200 million tonnes of coal and talk of (a widening of) CAD and merchandise trade deficit. We are forcing a country which has enough reserves to import.

Our foreign exchange reserves are around $280 billion. Imports last year were $490 billion and with the current level

of rupee and reserves, you can meet the import bill of seven months and (so there is need for panic).

There are enough rules in the foreign trade policy (which can be used) to curb imports.

Besides, we also have the applied and bound tariffs (under the WTO), and the applied ones can be raised where the difference between the two is large.

Should quantitative restrictions be put on coal imports

There is a need to import coal for power generation. It is too early (to talk about restrictions) and we need to be extremely careful. We cant put quantitative restrictions.

Have you assessed whether our bilateral free trade agreements with a host of countries have come in useful The Asean services pact is getting delayed.

The mechanism of review is inbuilt in every FTA/regional pact. The terms of what we do bilaterally in a CEPA (comprehensive economic partnership agreement) with Japan or South Korea may not be same as in the RCEP (regional comprehensive partnership agreement, as with Asean).There is no reluctance on the part of Asean to sign the services pact.

Will the EU FTA be signed during the remainder of the UPA-II regime

We have a robust agreement within reach but the window of opportunity is narrowing. Ambitious offers have been placed by both sides. All items on the wish list of both sides cant be met. But if you have an agreement on three-fourth of that, what do you do about that Sometimes while looking for the best, you might end up destroying the good. It also depends on how you look at it. I look at as a glass three-fourth full. It may be unwise to wait for it to be full and brim over.

Has the realisation on (the need to ease) FDI policy come a bit late given that the BJP has threatened to scrap the policy if it comes to power

We have a vitiated environment. The opposition is blinded completed by an irresponsible agenda and is scaring away investors. It has done enormous damage to the Indian economy. We (the Congress) have never reversed any decisions they made or made any threatening noises (like they do).

What is the progress on the national manufacturing and investment zones

We are proceeding fast. The master plan for seven NIMZs has been prepared and an eighth one is also on the cards.