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Krishnan Thiagarajan

IN YET another reaffirmation of the reformist credentials of the UPA Government, the Union Cabinet hiked the FDI (foreign direct investment) cap on domestic private airlines from 40 per cent to 49 per cent last week.

Though this move comes nearly four months after it was proposed in the Budget, it is a symbolic attempt at infusing confidence among the overseas and domestic business communities. Especially as the Left parties, which had opposed the proposal earlier, have now put their seal of approval on it.

This can also set the ball rolling on the FDI hikes proposed in telecom and insurance which have been on hold for a while now.

While important, the move is hardly as significant as the Government's recent attempts to examine the disinvestment of PSU equity through the public offer route, contemplated after the recent success of the NTPC offering.

For the government, which is working on a consensus basis, every hurdle crossed is likely to help it build momentum to push the reform process forward.

In a sense, after starting off on the wrong foot with the Common Minimum Programme, the Finance Minister — through the Budget — and the Prime Minister — by his consistent stance on priority for infrastructure — have sent the right policy signals and stabilised the jittery markets to a great extent.

It is inevitable, but every time the question of FDI is raised, China's success in attracting foreign investments and its linkages to strong economic performance are repeatedly trotted out.

In 2003, China is said to have attracted over 10 per cent of the total world FDI compared the 1.3 per cent by India, clearly showing that the latter still has a long way to go.

This brings us to two key questions: Going by the terms of the hike in the FDI cap in domestic airlines, what does it symbolise? Second, if this FDI move is extended to telecom and insurance, will it make a material difference to the flow of FDI?

FDI with riders: While the FDI cap has been increased to 49 per cent, it comes with two key riders.

One, the government wants with management control to remain in Indian hands.

Two, the Cabinet has dropped the plan of allowing foreign carriers to invest, directly or indirectly, in domestic airlines.

On the one hand, the two riders clearly show that this will remain but a symbolic move and may not materially enhance the flow of FDI. On the other, the Prime Minister, Dr Manmohan Singh, is building a mandate for infrastructure investments.

Speaking at the India-Asean Business Summit last week, he said that the government would be creating a transparent and independent regulatory framework for increasing the flow of foreign investment in infrastructure.

He also reiterated that the Indian economy had the ability to absorb $150 billion of foreign investment in this sector over the next ten years.

In his view, airports and railways require $55 billion over the next ten years while power and telecom needed $75 billion and $25 billion respectively over the next five years.

These aspirations of the Government appear to run counter to the intention of the Left parties.

Though the latterhave no objections to this latest hike in the FDI cap, they continue to remain fundamentally opposed to the FDI hike in telecom and insurance and privatisation of airports.

In a globally integrated economy, aiming to ensure that management control remains with Indian shareholders appears to be a futile exercise.

At least in a dynamic industry such as telecom, ceding management control to foreign investors will be imperative. Even today, some of the foreign telecom players have bypassed the sectoral cap through a complex financial engineering exercise and are calling the shots.

In the near term, it is likely that raising the FDI cap will benefit only two-three major existing groups such as Hutch, Bharti and Idea Cellular, and fresh FDI inflows from foreign telecom carriers are doubtful.

But keeping the FDI window open at all times is critical, as over the next year or two, once the full potential of Indian telecom, including broadband is unleashed, quite a few global telecom players would be willing to do a rethink.

Having an open and consistent policy framework for investment will definitely help at that stage.

For that matter, in insurance, the benefits of hiking the FDI cap from 26 per cent to 49 per cent will be realised much faster.

Quite a few private insurers are waiting for this policy decision to materialise as it will afford them greater financial flexibility to widen their product distribution network and offer the consumer more choices.

Unless the government goes the whole hog with FDI reforms, most of its aspirations on the infrastructure front will remain only on paper.

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