Just KISS!

Updated: Nov 21 2005, 05:30am hrs
Any hope that we will soon have a sensible, forward-looking foreign direct investment (FDI) policy has been buried, following Fridays Cabinet decision to refer it to a group of ministers (GoM). The argument that the decision was driven by the need for more precision in formulating guidelines does not wash. The FDI policy has been reviewed umpteen times in the past. There is little reason to believe the latest review by the GoM will yield anything materially superior. More so, since the most pragmatic policy would be to scrap the convoluted system of sectoral caps26% in insurance, 49% in civil aviation, 74 % in telecom and so onand replace it with a small, very small, negative list in, say, sectors like defence and nuclear energy, with all other sectors open to 100% FDI.

Instead, over the years, our FDI policy has become a complex web a virtual nightmare for genuine investors and heaven for consultants. In fact, arbitrary FDI limits, which are often fixed without any rationale, encourage lobbying and counter-lobbying, vitiating the investment climate and driving away genuine investors. The whole scheme of ceilings, which generally hovers around four magical numbers26%, 51%, 74% and 100%is difficult to appreciate. These ceilings serve little purpose other than pandering to xenophobic fears.

In fact, our huge funding requirement for infrastructure aloneestimated at $150 billion in the next five years should open policymakers eyes to the crying need for a more pro-active policy on FDI. Consider. In 2004, India received FDI worth just $5.34 billion (less than 1% of the global FDI flow of $650 billion). Contrast that with China, which received $60.6 billion, Hong Kong $34 billion and Singapore $16 billion.

The right course would be to find out what useful purpose, if any, these caps have served in the past. Take the example of the insurance sector. Can anyone rationally explain why the FDI cap was fixed at 26% and what purpose it has served, other than reining in the sector What will happen if the government tomorrow decides to remove the FDI cap Probably nothing; India will only become a more attractive FDI destination. Remember, we are not the only country that investors can choose to invest in. Our large market and booming economy gives us an advantage, but only upto a point. Beyond that, if our policy is not welcoming enough, investment will go elsewhere. Can we afford that