The timing of the review of the Foreign Direct Investment Policy on Thursday is just right, but the frequency of the change is just not right. The changes announced yesterday are to a policy just one year old.
The timing of the review of the Foreign Direct Investment Policy on Thursday is just right, but the frequency of the change is just not right. The changes announced yesterday are to a policy just one year old.
If a policy needs to be changed this drastically, just a year into its operation, it more or less tells us why foreign investment into the country is dipping so badly. It also tells us that the rise in foreign investment into India in 2010 was, therefore, riding a favourable global tailwind, that could sail despite the obstacles in the policy.
The comprehensive FDI policy, which rewrote a large part of our foreign investment rules, was issued in February 2010. The policy came at the end of the year, which saw a record $34.2 billion inflow into the country as per the statistics of the Department of Industrial Policy & Promotion (DIPP).
Since then, FDI into India has collapsed to $17.08 billion, a 25% decline in the April to January figure. Since the January 2011 data shows a 49% inflow dip, the chances of a fabulous turnaround in just the last two months of the year is extremely unlikely. If the rewrite of February 2010 was a plan to encourage FDI, this obviously should not have happened, even if we assume the global tailwind turned into a headwind in just a year. In very few sectors have we seen a roll back of reforms on such a massive scale.
Thursday?s rewrite of the FDI policy in just one page (press note) is, therefore, the mandarins? response to the disaster. DIPP has used the eraser to rub out almost every possible significant objection the foreign investors could have on procedures to claw back investments into India. If it is argued that the earlier version did not cause the current mayhem, then obviously there was no reason to make this review.
Of the changes made, while the final abolition of Press Note 1 of 2005 (earlier Press Note 18) earns notice, the more significant one is the change of guidelines for downstream investments. The government has removed the myriad classifications of what constitutes a foreign company to replace them with a single either-or classification. This means if Tata Sons, for instance, invites foreign investment in a company owned by it up to 49% of that company?s equity, it will not need to travel to the Foreign Investment Promotion Board (FIPB) for approval. As the example shows, there are few groups in India where this will not be significant. One suspects this will be the window through which some of the big ticket investments into India will flow in. The lack of clarity in this space had stymied the full development of the holding company route in India.
Coming to the abolition of Press Note 1, a perusal through the FIPB clearance list shows about 20% of the cases related to this obstacle. It is, of course, true that the government and other agencies had become more lenient towards what constituted the same field. But it was an obstacle nevertheless, and there was a genuine perception among segments of foreign investors that it was a rent-seeking clause that did India?s investment climate no good.
A badly needed relaxation made on Thursday is to the rules that were imposed in 2010 to specify the price of convertible instruments upfront. DIPP officials claim the restrictive clause was imposed because of RBI insistence. RBI wanted to be sure India?s aggregate exposure to foreign currency risk could be calculated precisely. That it made life difficult for a company to take advantage of instruments like the foreign currency convertible bond was apparently a redundant topic. Are you surprised the flow of FDI dipped so sharply?