The quotidian flavour of Press Note 18

Press Note 18 is the flavour of the day, with a face-off between the continuers and the removers from well-argued entrenchments. Life was much simpler in the olden days of the Directorate General of Technical Development (DGTD), when the marital alliance between international investors cum technology providers and the indigenous entrepreneur required their careful examination and whose approval wedded the two into an alliance of time slice technology and no parting.

Interest in investment in India grew post-liberalisation and several international firms expressed interest in investing in India by bringing in new technology, capital and management. Firms, which had subsisting collaboration agreements with Indian firms, found their way barred by these partners who felt that all entry into India should be channeled through existing partners. Matters came to a head some years ago, when industry associations lobbied with the government for an approach by which foreign collaborations could be approved only after obtaining a no objection from existing Indian partners of earlier agreements. Government articulated this procedure of no objection certificate through Press Note 18.

Having done away with licensing and the DGTD, government had introduced a one-stop procedure for clearance of foreign investments by setting up the Foreign Investment Promotion Board. Consisting of representatives of all relevant departments, this board met periodically to consider applications from investors seeking to invest here. With the introduction of Press Note 18, these firms had to produce no objection certificates from existing joint venture (JV) partners, if any. The arguments of international firms against this procedure has been that this provides a rent-seeking opportunity for the existing JV partner for granting the no objection certificate. There have been several cases where existing Indian firms agreed to the grant of the no objection certificates only at a high premium.

Second, the way the Press Note is worded, it applies to all applications by the international entity, even though the products sought to be manufactured are not covered by existing agreements. It appears to make little sense for a firm wanting to make chemicals, to obtain a no objection from a firm with which it has an agreement for, say, engineering goods. Third, this acts as a barrier against introduction of new management or even new locations, against FDI into India.

The arguments from the holders of the joint collaboration agreements have been equally fierce. It is pointed out that, during years when entry into India was difficult, these collaborations provided an opportunity for international firms which would otherwise not have been available. It would therefore be only fair that both should exploit the new growth opportunities together. Secondly, the financial muscle of international firms is very much more than their Indian counterparts. The local firms are naturally concerned that they would not be able to stand the competition. They would like the government to allow the partners to sort out the issue themselves.

It is interesting that even at policy levels, the debate has centered round the arguments of the interested parties. Policy has been captive to lobbying by interested groups, who have viewed the issue from the firm?s perspective. Of greater significance is the selection of the path to be followed for development of the manufacturing sector. Protection of indigenous industry and openness in FDI are not mutually incompatible. China has recently mandated that, by 2010, at least half the automobiles on its roads should be of Chinese origin, and that they should contain a majority of parts that are manufactured locally. The focus is on indigenisation, creation of manufacturing capacity, employment and much less on management and ownership. It is simpler to transfer profits out of India, than from several countries, including China.

It appears important to view this debate from a larger perspective. First, the growth of manufacturing and employment requires investment. It is more likely that firms who have already a presence in the country would seek to enhance their investments in new areas, and this should be encouraged, and all rent-seeking practices discouraged. It is iniquitous that firms seeking first time entry have an indirect advantage over firms, which have already invested in India. These imbalances must go. Press Note 18 creates an uncertainty for the investor, and needs to be done away with.

Second, it is important to recognise that assistance to local industry must continue to make it internationally competitive. The textile industry is gearing up for the post-2005 scenario, and there is still much more in the way of equipment support, marketing assistance, infrastructure etc that can be done. Other export leaders like pharmaceuticals and automobile ancillaries offer major future opportunities. It appears quite absurd that several Indian automobile ancillary units are seeking to create manufacturing facilities in China, rather than investing in India.

The solutions have to be industry-specific. Several expert committee recommendations are available, but lack of professionalism at the policy levels makes for poor implementation. In a globally competitive environment, it is important to follow a strategy that takes into account the strategies followed by others, instead of getting tied down to ideologies or processes. The long-term goal should be development of all, not of interested groups. There is a tremendous opportunity available now, in all the exercises going on in the Planning Commission, finance ministry and other committees. The forthcoming budget should be an articulation of growth strategy and employment creation in industry, which has been promised in the CMP. Finally, there is need to improve infrastructure. All ports are clogged with rising imports and exports. Can we move away from seeing scarcity situations as arbitrage opportunities for inspectors, and get on with building facilities that are international in class?

The author is a former finance secretary and economic advisor to the PM