Lotus eaters yet to get their act together

So, goodbye to FDI with scarcely a substitute in sight

Jay Bhattacharjee

The Indian policy framework on foreign direct investment in key industrial sectors has been a model of confusion and obfuscation from the beginning of the liberalisation era. In fact, the initial priority of the Manmohan Singh regime in the early-nineties was to roll out the red carpet to foreign portfolio investment (through the FII route), while giving the cold shoulder to overseas industrial investment. Between 1992 and 1997, the learned professor and those who stepped into his shoes as finance minister were so besotted with the flow of FII funds into the country’s stock markets, that the much-needed thrust on developing a meaningful policy structure for FDI was put on the backburner. This analyst, in the good company of many colleagues, emphasised that FDI was the need of the hour, particularly in the infrastructure sectors. The flip side of the coin was that no country, in the past, had developed with the assistance of overseas portfolio investment alone.

The development of the US railway system, particularly the great thrust in the last three decades of the 19th century, was primarily financed by British investors. Similarly, the Tsarist Russian railway network, including the trans-Siberian route, was made possible because of a liberal inflow of funds from France. In the post-second World War scenario, Western Europe’s economic recovery was considerably hastened because of US industrial investment. During the initial years of transition from a licence-raj to a market-driven economy, India had clear choices. It was not foreign portfolio investment or FDI — there was no question of an either-or situation. Our decision-makers should have said yes to both and devised appropriate policy measures. Instead, we saw an absurd scenario where overseas portfolio investors were given preferential tax concessions that were not available to domestic investors.

The reference, of course, is to the concessional tax rate of 10 per cent charged on long-term capital gains of FIIs, while ordinary Indian mortals (individual and corporate) were charged 20 per cent. On the FDI front, New Delhi made appropriate noises at seminars and conferences, whether in Davos or in Vigyan Bhavan. On paper, the door was open in the case of most industries ie the list of sectors where FDI was not permitted was very small. In practice however, international industrial investors had to go through a labyrinth of rules, regulations, statutes and diktats that tested the patience of the most dogged adventurer. Mind you, India had staunch supporters, like Jack Welch (of General Electric) and Percy Barnevik (of ABB). Despite the goodwill generated by such people, we blew the opportunity.

In each industrial sector where FDI inflow in large quantities was critically important for the economy, the process of deregulation and policy formulation dragged on. The Indian record in the power and telecom sectors is there for everyone to inspect and introspect on. When we did implement some high-profile mega projects, we did not carry out the necessary due diligence exercises on the foreign companies knocking on our doors. The Enron mess will haunt the mandarins for ever and not merely because of the company’s present travails in the US. Unsavoury facts are now emerging from the SEC enquiries, and many international observers have known for some time that all was not kosher with the energy giant.

When the central and Maharashtra authorities were negotiating with Enron in the mid-1990s, many analysts had pointed out major flaws in the deal. These observations were cavalierly dismissed by the babus and the netas, and the critics were labelled as Luddites or worse. A couple of pink papers also went overboard in their zeal for the firang investors. Be that as it may, the sombre fact is that India’s track-record in attracting FDI in the last decade is not even 10 per cent as successful as China’s. Not that China is better placed than us on issues like transparency, probity and incorruptibility. On most indices compiled by organisations like Transparency International, the two are in the same league. What distinguishes China from us is that their administrative machinery delivers after making a commitment.

Put plainly, the common perception of the Indian “elite” in international business circles is that its members, collectively, do not generally keep their side of the bargain. It is not necessarily graft or share of the loot that accounts for this lack of teamwork. In many cases, it is pure ego and individualism. When bureaucrats and ministers in and around Raisina Hill fight for their turf, it is not always for the gravy. However, viewed from multinational board rooms, the conclusion is the same. The Indian lotus eaters have not got their act together and show no signs of doing so. Best pack one’s bags and return. Will the last person leaving the room please turn off the lights?

The writer is a senior corporate analyst and Member of the Delhi Stock Exchange