The Hindu Business Line : Compete or perish

THE controversy over the continuance of Press Note 18 is welcome because it has focussed attention on an issue which has become fundamental in the current regime of economic liberalisation.

Very briefly, the central issue is one of allowing foreign investors to compete freely in the Indian economic environment, to enable them to search for and exploit avenues of their own choice to make profits.

All this will, of course, have to be done within the permitted enabling environment, the thrust of the authorities being — in an era of economic liberalisation — to enable investment players (both domestic and foreign) to play as freely as possible, in the process augmenting the economic wealth of the nation.

As far as Press Note 18 is concerned, when it was introduced four years ago by the NDA Government, the overriding objective was to protect the domestic partner of a joint venture with a foreign investor from the latter (usually the stronger partner) utilising the joint-venture experience to set up shop singlehanded in the same market. (The chosen instrument here was that of the NOC which had to be given to the foreign partner by the domestic partner.)

In other words, the "conflict of interest" argument was used to protect the domestic partner from having to fight an unequal battle later, which was certainly good for the short-term prospects of the Indian company concerned but totally unacceptable to the foreign investor whose only objective to operate in the Indian economy is to make profits.

Not surprisingly, in the current era of economic liberalisation, Press Note 18 has come to be seen as an instrument of protection in the hands of those who would like to protect their economic turf even if by doing so they perpetuate an inefficient production line and raise costs all around for the economy, the consumer included.

This, clearly, is not preferable in an economy such as India which is widely perceived to be "on the move" so to speak, quite apart from the fact that such regulations take a lot of fizz out of the invitations continually being extended by the VVIPs like the Prime Minister to foreign investors to put their money into the country.

From the point of view of economic efficiency, therefore, Press Note 18 should be discarded, which would mean that the foreign partner in a joint venture would be allowed total freedom to set up shop single-handed in any area of economic activity it chose to do so.

Conversely, what this implies is that only those Indian joint venture partners confident of their own production prowess would feel secure in entering into joint venture agreements with foreign players, which certainly cannot be interpreted as an anti-Indian sentiment in any rational sense of the term.

But the problem today is that there already are a large number of joint ventures between domestic and foreign players where the Indian partner is the weaker party, the latter probably having to close shop if the foreign partner were to set up a separate unit in the same area of operations.

It would be unjust to these Indian investors if they were suddenly asked to cope with a threat, which was specifically ruled out at the time they decided to sink funds in a joint venture.

What this implies is that there can be no summary withdrawal of Press Note 18 which would affect joint venture companies governed by it till now.

One course of action would be to amend the regulation so that a foreign partner in any joint venture (set up after a cut-off date) be allowed the freedom to set up shop elsewhere without having to obtain an NOC from its Indian partner — but only after, say, a period of three years, during which time it can be reasonably expected that an Indian joint-venture partner worth its salt would be able to stand on its feet and stave off competition.

Another alternative would be to scrap the regulation altogether for all new joint ventures, which would remove the "scourge" of Press Note 18 altogether from the Indian economic regulatory scheme.

Clearly, the Government should act expeditiously always keeping in mind the fact that such controversies could have the effect of rocking too strongly the boat of the present UPA regime for the good of the national economy.

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