The Hindu Business Line : Telecom: Why higher FDI cap will not bring investors

CONTRARY to what the Ministry of Finance is claiming, the chances of foreign investors flocking to India after the cap on foreign direct investment (FDI) in telecommunications companies is increased to 74 per cent do not appear particularly bright. This is what international experience reveals.

The Left parties argued: "Most countries, including the US, Canada, France, Taiwan, Korea and Indonesia, have restrictions on foreign ownership in the telecom sector. Both the advanced and the fast-developing countries have such caps. The US, in particular, has a limit for all radio licences (including cellular) of up to 20 per cent. In the case of holding companies, the limit is 25 per cent. Exemption is allowed on case-by-case basis, but until 1994 no such approval was actually given. Even thereafter, approvals are not easily given and the Federal Communication Commission evaluates in detail the effect on national security, public interest and competition in the marketplace."

The response of the infrastructure section of the Department of Economic Affairs in the Ministry of Finance was: "It is because of this strategic importance that foreign capital in the telecom sector is strictly regulated in most advanced and developing countries... This is not the correct position. The table in the note (submitted by the Left parties) gives an incomplete and in that sense, an incorrect picture of the situation. (The note) clearly shows that there are a large number of countries that do not impose any restriction on FDI in telecom. This is particularly so for most advanced countries (including the UK and Germany) and for some large developing countries, including Argentina and Brazil. Further, in Japan, the FDI limit relates only to the `incumbent' state-owned service provider. It is possible to have a different FDI policy for such incumbents together with a more liberal FDI policy `for other service providers'. For instance, Japan has a permissive policy for non-incumbent service providers."

The Government's allegation that the Left's note presents an incomplete, and therefore, an incorrect picture is misplaced. The Left note only lists a few countries and does so accurately. It does not pretend that the list is comprehensive. The list provided by the Government, however, is that of developed countries or those known as developing countries but nevertheless advanced in comparison to India in terms of their per capita incomes and teledensity levels (see Table).

To compare the countries listed in the table would be misleading for a number of reasons. First, there is no simple relationship between per capita income and teledensity. Many of the countries listed have high levels of telephone penetration with teledensity levels that are many times higher than India's. Most of these countries have invited FDI not for building basic infrastructure, but to augment competition or improve the quality of telecom services. The objectives that guided these countries to invite foreign investments were entirely different from those that have been mentioned by the Indian government.

Moreover, many of the countries listed allowed FDI only after the teledensity and the per capita incomes had gone up to certain levels. India lags behind most of the other countries on both teledensity levels and per capita incomes. Not one of the countries listed has allowed foreign investors to hold majority shares in their telecom firms at the per capita income and teledensity levels that prevail in India. Each of these countries had significantly well-established domestic telecom companies before FDI was introduced and the attempt was to bring in FDI to introduce greater competition. Many of the developed countries in the list are the very ones the government on other occasions avoids comparisons with, citing incompatibility on socio-economic grounds.

The Finance Ministry note added: "It is true that some important countries still place restrictions on FDI in the telecom sector. However, in a number of countries, the rapid technological advances in the last decade or so and the growing realisation that liberalising the telecom sector is (the) key to overall industry growth are resulting in relaxation of these constraints worldwide. Most governments have made specific commitments to open up their market in the (World Trade Organisation's) General Agreement on Trade in Services (GATS). Even in basic telecommunication, a large number of governments have made liberal commitments on some or all services."

The government's categorisation that some countries have restrictions on FDI in telecom is misleading. The fact is that a majority of the countries have such restrictions. The point on technology leading to greater FDI levels is neither substantiated nor is it meaningful. Technology and the benefits flowing from it can lead to enhanced teledensity, faster growth, consumer benefits or even lead to international firms manufacturing telecom equipment in the country. However, what should be noted is the fact that India already allows 100 per cent FDI in the manufacture of telecom equipment. The Government note should have confined itself to FDI in telecom services. There is no correlation whatsoever between technology development and higher levels of FDI. If there is one, the government has failed to substantiate the logic behind its arguments.

As for the WTO, the Government's note is again misleading about how specific commitments are being made by countries to open up their market. The fact is that approximately 70 countries have made specific commitments to the WTO on telecommunications services. These commitments are far from liberal as stated by the government. More important, India's commitment at WTO is rated as amongst the "worst" made by any country. In terms of FDI cap, India's commitment to the WTO mentions a figure of 25 per cent against 49 per cent "officially" allowed. New Delhi has sought exemptions across the board on international best practices mentioned in the WTO Reference Paper relating to issues of anti-competitive cross-subsidies, universal service obligation, interconnection, allocation of scarce resources and public availability of licensing criteria.

If India wants to attract greater investments in telecom, it can be argued that the Government would first need to adhere fully to the conditions laid down in the WTO Reference Paper, especially on such issues as a transparent and fair interconnection regime. It may be further argued that the absence of a more sincere representation of India's position on certain fundamental issues relating to the telecom industry at the WTO has probably done more to dissuade foreign investors from coming to the country than the 49 per cent FDI cap.

The Finance Ministry note has claimed: "At present, out of 29 OECD (Organisation of Economic Cooperation and Development) countries, FDI restrictions in the telecom sector are present only in a few countries (Canada, Korea, Mexico, Poland and Turkey) with restrictions only for mobile services in France and the United States. Other OECD countries, including the UK, Germany and Japan, do not have any restrictions. In case of the US, there is restriction only on grant of radio licenses to foreign companies; however, it appears that these restrictions do not operate in case of indirect foreign ownership from third parties and possibly also to lease of the radio license. Even in the USA, fixed, trunk and international services have no restrictions and even companies not incorporated in the USA can provide such services. Finally, the European Commission and other countries have asked the US to lift these restrictions as part of the GATS negotiations."

Yet again, the countries mentioned are mainly developed countries, including those in the OECD. Nations with economies comparable to that of India — Mexico, Poland or Turkey — have restrictions on FDI as per the government's own note. As for the US, the information given in the note seems incorrect. In fact, the use of the phrase "it appears" makes it sound doubtful. The US government has specifically imposed restrictions on FDI on radio licensing. A committee comprising representatives of the Federal Communications Commission (FCC), the US Department of Homeland Security, the Central Intelligence Agency (CIA), the Federal Bureau of Investigation (FBI) and the Department of Justice are convened under the office of the US President to give a case-by-case security clearance for such investments.

Then, New Delhi has cited the European Union/Commission's demand lifting of US restrictions as a part of GATS negotiations out of context. Such requests are made on a daily basis as a part of ongoing negotiations. A US decision to lift restrictions (if and when that is done) could well be accompanied with that country obtaining some major counter trade benefit for itself vis-à-vis the EU.

The US would probably lift restrictions on foreign investment in radio licensing only after it has succeeded in delivering a disproportionately higher benefit to its own trade and industry. The citing of the request itself is irrelevant and misleading.

(Concluded)

(The author, a senior journalist, is Director, School of Convergence, New Delhi. He can be contacted at paranjoy@yahoo.com.)

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