The Hindu Business Line : The Volkswagen embarrassment

THE DECISION TO order a Central Bureau of Investigation probe into the payment of Rs 11 crore by the investment arm of the Andhra Pradesh Government to a Delhi-based firm ostensibly representing the European car-maker Volkswagen should give the State Government a breather to handle the political fallout of what is turning out for it a huge embarrassment. Now, the Government can take the line that action will follow once the investigation is complete. Also, the money may well be safe, as the AP Chief Minister contends. After all, Volkswagen's local representative was clearly instrumental in the AP Government making the payment to the Delhi firm and so the company cannot escape the moral responsibility for the acts of its employees even if the individual has gone far beyond his brief or acted with mala fide intentions. Its financial woes may lead to Volkswagen putting on hold its India foray, but it cannot afford to be the source of continuing embarrassment to the party in power at the State and the dominant partner in the coalition that rules the country, which is one of the fastest growing auto markets.

But the issue goes beyond the recovery of the money paid by the Andhra Pradesh Industrial Investment Corporation. There could not have been a poorer example of decision-making involving equity contribution by a government agency towards industrial promotion of the State. It is axiomatic that such investments must fit into the larger policy on use of public funds to promote investment activity in the State. Only where an entrepreneur has neither thefunds nor financial backers can recourse be taken to public funds sans which a project may have to be given up. Last year Volkswagen made a net profit in excess of 600 million euros. In 2001, its profits were a whopping 4 billion euros. Surely Volkswagen did not need a paltry 5 million euro from the AP Government to start an unit in India whose investment needs must run into hundreds of million euros. The other significant policy aspects are whether the State needs to attract investments on such terms or whether it should have betrayed such desperation that it did not even want to ascertain if there would be a matching contribution from the German company. Even the argument that the money was to demonstrate the AP Government's commitment to the project does not wash as there are more tangible parameters of commitment such as the well-developed infrastructure or the reputation for honest, transparent and prompt dealings with investors.

True, Andhra Pradesh has a vast population steeped in poverty. A strategy of promoting industrial activity with spin-off benefits in the services sector cannot also be faulted. But where the State Government has gone wrong, as indeed have others, is in vesting certain projects with a capability far in excess of their potential to boost incomes. Bidding successfully for mega projects may score some debating points with the opposition. But it is surely not the solution to poverty alleviation. Political parties must realise that in the long run it is by investing in physical and social infrastructure that a sustainable flow of investments can be ensured and not by knee-jerk responses to demands for equity contributions.

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