UPA's flashflood of FDI reforms is too little too late

Finally, the United Progressive Alliance has been forced to act.

In a rash of reforms yesterday, it relaxed FDI limits in 13 of the 20 sectors, including the contentious telecom, defence and insurance.

The steps have been widely welcomed.

“The reforms demonstrate that there is a desire to make process easier and attract fresh investments. All these decisions are positive and there is an indication that other areas would also be considered,” Ficci President Naina Lal Kidwai has said.

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But just how are these reforms going to play out? In the short term, it is surely going to be a sentiment booster for the markets.

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[caption id=“attachment_962111” align=“alignleft” width=“380”] All political parties will try to extract their pound of flesh from these reforms. This is also likely to make multinational companies cautious. After all how can they be sure that there will not be a change in policy after the elections, if some other party comes to power?
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Consider the timing of these announcements. The government’s announcements came soon after the RBI’s liquidity squeezing steps that roiled the markets as investors took them as a step closer to raising rates.

In other words, one hand takes away, the other gives. It seems to be a fine balancing act by the authorities.

Take a look at the two important sectors where the limit has been relaxed:

1. In telecom, FDI cap in telecom raised to 100 percent from 74 percent; up to 49 percent through automatic route;

2. FDI cap in defence production has been retained at 26 percent, but higher investment may be considered in state-of-the-art technology production by Cabinet Committee on Security (CCS).

In telecom, the step is welcome given the sorry financial state of the major players there. Profitability has decreased drastically because of the cut-throat competition and the players are being crushed under huge debt burden.

Only players with enough financial muscle can survive here. Now with FDI at 100 percent, one should expect more multinational companies with more financial backbone to foray into this sector.

However, the ground reality is that policy flip-flops, corruption scandals and umpteen court cases can make the sector unattractive.

Now, take the defence sector. As per the proposal, investments higher than 26 percent may be considered in state-of-the-art technology production by Cabinet Committee on Security (CCS).

Who decides whether a technology is state-of-the-art or not? The government. This clause has the potential to be severely restrictive and can easily make the sector unattractive for many foreign players.

At least two of the sectors, with high growth potential, have a sword of suspicion over them.

This is not to say that the steps taken by the government are not significant. They are important. What is evident is the sense of urgency.

“Wherever we have made changes, a cabinet note will be moved immediately and will take up all of them. Decision stands taken,” Commerce Minister Anand Sharma told the reporters.

“The decisions have been taken by consensus and the cabinet note will be moved immediately after which the new norms will be notified,” he said.

The emphasis here seems to be on the word “immediately”. With the buzz of early elections getting louder, the UPA, long criticised for its inaction on the policy front, is now acting to show that it is serious about the economy.

But urgency has its pitfalls. A case in point is the stake deal between Jet Airways and Abu Dhabi’s Etihad Ariways. Along with the stake deal announcement from the companies came the government’s decision to increase the seat entitlements for Abu Dhabi, giving rise to suspicion of foul play in the deal.

The rash decision has now put not only the civil aviation ministry but also the Prime Minister’s Office in a spot. The government’s dithering is now threatening to derail the deal.

Given the backtracking record of the UPA, there is no surety that these proposals are indeed going to be implemented.

With an eye on elections, the political sabre rattling over the latest reforms has already started.

Trinamool Congress leader Mamata Bannerjee has expressed her deep anguish already. The Left parties are also likely to raise their voice. One can even expect a rash of protests, even from the Bharatiya Janata Party and its prime ministerial candidate Narendra Modi.

All political parties will try to extract their pound of flesh from these reforms. This is also likely to make multinational companies cautious. After all how can they be sure that there will not be a change in policy after the elections, if some other party comes to power?

All these could have been avoided, had these steps been introduced over the last few years, when various UPA ministers were busy taking bribes and bending rules for their own benefits.

The late decisions also may mean that the UPA will not be in a position to reap the benefits of its good work, if people decide they do not want the Congress to continue at the helm.

Moreover, these steps are long term in nature. Any flow of capital will start only in a year’s time. And that is a minimum time horizon.

But never mind. They are paying a price for its many years of inaction.