The Hindu Business Line : Why Press Note 18 needs to be scrapped

THERE is now much debate as to whether the Press Note 18 should be scrapped. While the Government appears determined to do just that and make India more attractive for foreign direct investment (FDI), many industrialists want it to continue.

According to Press Note 18, a foreign company that has entered into a joint venture or embarked on a technology transfer/trademark agreement with a domestic company in a particular field of operation will not get an automatic approval from the Reserve Bank of India to open another such venture in the same field. This will be so regardless of whether the new venture is with a new company or on its own.

Press Note 18, in fact, has created an appalling image of the country as an FDI destination. It is non-compatible with international rules of business.

There is no logic in letting Press Note 18, issued in 1998 by the Department of Industrial Policy and Promotion, continue after opening up much ofthe manufacturing sector to 100 per cent FDI.

Ironically, it is those companies which responded to India's liberalisation call early and reposed confidence in the country's economy that are bearing the brunt of Press Note 18.

The FDI inflow into India has fallen short of the Plan target. During 1991-2003, the FDI inflow was only $35.5 billion, a figure that is less than what China receives in one year.

This, despite the fact that India is considered attractive for FDI. According to a study by the UK-based Economist Intelligence Unit (which surveyed 500 CEOs in the world), India is becoming a hot destination for FDI.

According to the survey, "India's astonishing technology revolution has been noted by the investors, with companies from a range of industries — including IT and service sectors — citing India as the world's top target for R&D investment. The country offers an attractive new customer market and better opportunities than other large emerging markets".

However, the survey noted that the results were surprising, given that India has not introduced any investment-friendly policy recently.

In India, the joint venture route is most attractive for foreign investors. There are numerous laws and regulations as also cumbersome procedures to start a business operation. In such a situation, most foreign investors prefer to play safe and opt for the joint venture route. However, Press Note 18 is scaring foreign investors away.

Ever since it was introduced, FDI through the joint venture route has slumped, especially in such sectors as telecom and financial services, where 100 per cent FDI is not allowed.

During 1999-2002, the telecom and service sectors accounted for more than 56 per cent of the total FDI approved through joint ventures.

Thus, FDI through the 100 per cent route has become the preferred option for foreign investors. But this is feasible only for the big MNCs.

For medium- and small-scale foreign investors, who would have preferred investment through joint ventures, Press Note 18 is major roadblock.

If Press Note 18 is really the protector of domestic entrepreneurs as is often claimed, then how come the Indian business houses are loosing their market share?

In fact, Press Note 18 was never meant to protect the domestic industry. Rather, it was issued to encourage domestic entrepreneurs to invest. It is said that a few domestic entrepreneurs used their power to force the government to deviate from reforms.

In most joint ventures earlier, regardless of whether the Indian partners have a minority or majority shareholding, the operations were in the hands of foreign investors. The domestic firms were like sleeping partners.

As a result, when the foreign investors wanted to set up their own 100 per cent subsidiary, the domestic partners were in trouble. And, hence, was born Press Note 18.

It is sad that the country's business chambers and associations plead for the continuation of Press Note 18 even after a decade of reforms. Also, in view of the growing prominence of FTAs (free trade agreements), Press Note 18 looses its significance even if it is modified.

Instead of protecting the domestic partner, it will hurt the joint venture if the foreign partners dump goods made in the FTA partner country. The industry bodies appear to be less clued into global changes.

(The author is senior researcher in a New Delhi-based Japanese multinational firm.)

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