Budget 2014: Dear FM, don't just woo FDI, make it feel welcome

In June 1994, US Secretary of Energy Hazel O’Leary visited India with an entourage of 78 delegates, including a large number from the power sector. They were attracted by India’s so-called fast track clearances and cost plus pricing with sovereign guarantees (remember Enron?). The visit came in for Congressional investigation. It was among over one hundred undertaken by O’Leary and cost the US taxpayer $730,000 including about half a million dollars in aircraft hire charges.

Such expensive tours for hawking foreign direct investment to India are rare, but the inflows continue, at a somewhat unambitious rate of $ 25 billion per annum for the last few years.

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Contrary to popular perception, India’s FDI policy is quite liberal. FDI is permitted in almost all sectors of the economy except lotteries, casinos, real estate, tobacco and atomic energy. Railways were the only infrastructure area which was no-go; this is likely to soon change. The industries secretary says there should be one composite cap for FDI and foreign portfolio investment. I am not sure. It could create confusion: as FIIs buy and sell on a daily basis, there will be uncertainly about how much of residual equity can be offered to strategic partners (as an entrepreneur, I have suffered grievously at the hands of this policy ambiguity around 2005).

I would go along with the industries secretary in treating non-resident Indians at par with Indian citizens. Imagine an archaic rule which says that even if NRIs invest in “non repatriable dollars” - which simply means that they convert their dollars into Indian rupees on the first day without ever being able to convert back into dollars, in effect making it a rupee investment - even that is calculated within the FDI cap! Surely India’s bureaucracy takes the cake in creating outrageously silly policies.

[caption id=“attachment_89976” align=“alignleft” width=“380”]  It’s not just about attracting investment. Reuters image.[/caption]

I also think the plethora of different “caps” should be replaced with just the three that matter: areas were 100 percent FDI is allowed; those where it can go up to 74 percent so Indians can have a say in special resolutions; and industries that should remain in Indian control, with FDI under 49 percent.

But the important issue is not about permitting foreign investment; the critical thing is to make it feel welcome. The last government spoke in many voices as ministries carved out exceptions without regard to overall government intention.

Even as senior government leaders including the Prime Minister advocated FDI in organised retailing, we had the consumer affairs ministry imposing a rule that prohibited an Indian-owned retailing company from sourcing more than a third of its turnover from a wholesale joint venture in which it had a foreign partner; another condition stipulated that a third of the procurement had to be from local small and medium enterprises. Little surprise then that the policy stays stillborn; as the Americans would say, “now go figure”!

What we saw during the two terms of the UPA was a Leftist backlash in the garb of inclusive development. Though the Communists have shrunk electorally, Leftish thinking occupies mind space out of proportion to their clout with voters. I am not for a moment saying that the poor should be ignored. The emphasis should be on helping them help themselves. For this we need to create an environment that encourages enterprise at all levels.

The time has also come to unleash the potential of our public sector undertakings. In fact, the accumulated wealth of our public sector can be leveraged to create an entirely new stream of FDI. I have written extensively about an India Renaissance Fund, to which government holdings in PSUs will be transferred. The idea is to create a trillion dollar fund like Singapore’s Temasek Holdings, set up in 1974, which China emulated in 2008.

It will be managed by a board of professionals with a two point mandate: (a) to create value by improving the governance of portfolio companies and (b) to monetize that value by buying and selling equity in the fund (instead of directly in the portfolio companies). This should be done not necessarily when the government wants money, but when market conditions are right.

With the enterprise function outsourced, the government will be free to focus on the policy function - determining what is good for all citizens and not just those who are employed in the companies it owns. The fund and its mandate should have legislative backing; its autonomy should be guaranteed by Parliament.

An article in the Business Standard says PSUs are sitting on huge amounts of cash when they should be deploying them in their businesses (or returning it to shareholders). For instance, Coal India’s cash as share of market cap (Rs 241,000 cr) is 26 percent, that of NHPC (market cap Rs 28,000 cr) is 28 percent and NMDC’s (market cap Rs 7,1000 cr) close to 30 percent. They should be sweating out their money not putting it to sleep.

As is clear from the above, the budget need not worry about “opening the floodgates” (an oft flogged media phrase). Instead, it should massage some oil into the rusted hinges so that the floodgates swing smoothly in welcome.