The Hindu Business Line : Investment Commission

If access to markets, distribution networks, technologies and strategic assets such as brand names are the main motivations for Indian companies to go abroad, similar advantages are woefully absent for foreign investors here. Without addressing these lacunae, setting up another agency called the Investment Commission would only serve the purpose of adding to the transaction costs of potential investors, domestic and foreign.

THE United Progressive Alliance (UPA) Government, headed by the Prime Minister, Dr Manmohan Singh, appears to be treading risky ground on the crucial issue of attracting foreign direct investment (FDI). It is no coincidence that the Finance Minister, Mr P. Chidamabaram, who held the same portfolio in the United Front government in 1996-98, is the author of the Investment Commission proposal announced in the Budget presented on July 8.

After three months, the Union Cabinet last week cleared the setting up of an Investment Commission to promote domestic and foreign investment. It would, Mr Chidambaram said, be "located in the Finance Ministry and will enjoy operational autonomy and government support".

As explained by Mr Chidambaram in his Budget speech, FDI has the potential to add a competitive edge, especially in the industrial sector. In support of this stand, the UPA government spent much time trying to convince the parties supporting it from outside about the potential benefits of the Budget proposal to raise the sectoral cap in three sectors of the economy — civil aviation, telecommunication and insurance.

It is to the Government's credit that it was able to overcome opposition to hike FDI in civil aviation from 40 per cent to 49 per cent, though it could not bring around its Left allies on the other two key areas for attracting FDI into India.

In tune with the National Common Minimum Programme (NCMP) that FDI would continue to be encouraged and actively sought, particularly in the areas of infrastructure, high technology and exports, the Government preferred the soft option of launching the Investment Commission immediately to taking up other contentious issues such as raising the sectoral cap in the telecom and insurance sectors.

Nevertheless, the tussle between the Ministry of Commerce and Industry, and the Ministry of Finance over the Investment Commission, and where it should be quartered, has not gone unnoticed.

To recap: Till a couple of years ago, the Department of Industrial Policy Promotion under the Commerce and Industry Ministry was mainly responsible for matters relating to FDI till the then Commerce and Industry Minister, Murasoli Maran, fell seriously ill. The National Democratic Alliance (NDA) government then made over the Foreign Investment Promotion Board (FIPB) to the Finance Ministry under Mr Jaswant Singh.

While the FIPB has been playing a constructive role serving as a one-stop centre for securing the approval of different ministries and departments to investment proposals from abroad, Mr Chidambaram felt that this agency could be supplemented and strengthened by an investment commission that would take the responsibility of interacting with domestic and foreign investors.

Interestingly, at a function organised by the Confederation of Indian Industry (CII) a day after the Union Cabinet gave its nod for the setting up of an Investment Commission, the Union Commerce and Industry Minister, Mr Kamal Nath, proposed that there should be a trade and investment promotion body in all economic ministries to see that investments in that sector were spurred.

The proposal sounds appealing insofar as it makes the Investment Commission redundant and might prevent the Finance Ministry from becoming all-powerful; as foreign investors are unlikely to be interested in holding talks with bureaucrats, ex-ministers or experts, however eminently qualified they might be to head the proposed Commission.

With expenditure management to reduce the role of government being the norm elsewhere, only in India does the tendency persist to open several "single-window" clearance systems, often created to `accommodate' retired bureaucrats. to .

After his recent visit to the UK, the Planning Commission Deputy Chairman, Dr Montek Singh Ahluwalia, told Business Line that the visit was very "useful in presenting Government policies on economic matters. I sensed that investors greatly welcomed the broad framework policy the Prime Minister had explained, including the fact that we are giving high priority to certain elements where we see gaps — one of them is the social sector. Another is agriculture, where there had been neglect and we want to reverse that. Finally, there is infrastructure. The Prime Minister pointed out the major initiatives including private investment and public-private partnership."

If the top managers in the Government are themselves the best advertisement for the UPA Government's reformist credentials, , does it require `one more window' to persuade investors, domestic and foreign, to test the waters here?

It defies reason that when the Finance Minister himself is an articulate advocate of reforms and FDI, he should be setting up an Investment Commission, with all its attendant red-tape.It is also ironic that the Finance Minister has dumped the India Development Initiative, launched only a year ago by his predecessor to showcase India as a manufacturing hub and attractive investor destination. This will only send the wrong signal to foreign investors that even the Investment Commission being set up now could be a casualty if there is a change of government.

Foreign investors, as is well-known, are lured not by the proverbial persuasion of the bureaucracy or the politicians as they are by the broad policy framework, stability of the government and consistency in policy.

One need to look far to get the latest data on FDI inflows into the country since the economic reforms were launched by the Congress(I)in 1991. From January 1, 1991 to July 2004, the amount of FDI approved by India was $66.56 billion, while the actual inflows (including American Depository Receipts/Global Depository Receipts) was $30.89 billion, as per Ministry of Industry figures.

While actual FDI inflows amounted to $2.52 billion in 2003 and $3.79 billion in 2002, the global investors' darling — China — continues to attract not less than $40 billion per annum — a fact that all members of the ruling UPA coalition should be aware of.

A recent study by the UN Conference on Trade and Development (Unctad) reveals that India's outward FDI flows have risen rapidly, growing from a low $0.6 billion in 1996 to $5.1 billion in 2003, taking India to the 14th slot in terms of outward FDI stock among developing economies. It is noteworthy that India's annual average outward FDI flows during 2001-03 reached $1.1 billion, comparable to those of Malaysia and well nigh double Greece's.

The burgeoning competitiveness of Indian firms and their zest to expand globally, particularly in information technology-related services and pharmaceuticals, are driving the country's outward FDI growth. On balance, despite all the talk of making India an attractive FDI destination, the fact remains that India's outward FDI looks far better than what the country gets by way of inward investment.

If access to markets (doing jobs outsourced by clients abroad), natural resources (production-sharing arrangement in foreign countries by taking up stakes), distribution networks, foreign technologies and strategic assets such as brand names are the main motivations for Indian companies to go abroad and globalise, the same advantages are woefully absent for foreign investors here.

Entry and exit barriers, rigid labour laws and sectoral caps in investment haunt them from day one. Instead of dealing with the broader policy framework to minimise these constraints, the Government is keen on opening yet another window which would only add to the transaction costs of potential investors, domestic and foreign.

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