India, and the art of driving away FDI

We did, perhaps, need this crisis to remind ourselves how globally connected we all are. There was a time when our experts were talking about “de-coupling” and how our financial systems were stronger, and the post-Lehman global financial crisis did not hit us hard. We also patted ourselves on the back, saying that because our growth was driven by domestic exigencies, we were relatively protected from global swings.

I am referring to the rupee’s current rocky relationship with the dollar. All it took was the suggestion that the US might start reducing its bond purchases to make foreign investors run back to mama. And our rupee to plunge.

There is no comfort in being told that Indonesia and Brazil are also facing similar pressures. It is time to look at what we can learn from the situation so we recognise that there are some things within our control.

Fair-weather friends

Foreign Institutional Investors (FII) are known to be fair-weather friends. They can and do move money by the click of a mouse and place very low weight on loyalty and the long term. It is good to invite them for some fun times in the evening but we all know they leave when the party is over. What have we done to those who moved into the flat next door because they wanted to be with us? I refer to Foreign Direct Investment (FDI).

We don’t particularly shine in taking care of them. Nokia, the mobile phone manufacturer, has been struggling in the global marketplace. It faces challenges in developed markets from competing suppliers; their speed with high-end and innovative products has left Nokia holding on to what it has in the developing world, while it recoups. At such a time, it would like to be focused on product development while also aiming for manufacturing efficiencies to help improve margins. In other words, it does not want an adverse signal from the Tamil Nadu government.

Unkept promise

I’m referring to the recent report that the mobile phone-maker, with a manufacturing plant on the outskirts of Chennai, apparently was not getting the tax refunds it had been promised for a period of 10 years, as incentive for setting up the plant. The company has also been subjected to tax raids; the matter could, perhaps, have been discussed and sorted out across the table.

Companies constantly worry about the vagaries of the marketplace and how to deal with fickle customers. However, they like certainty when it comes to government policies and regulatory matters.

Now, there are reports that Nokia may shift its base to China.

The Chinese government understands better the notions of stability and certainty. You make a deal and parties honour it.

Speaking of deals, the Tamil Nadu government was reportedly not paying its wind power producers on time. In a State that is chronically short on power, you would think better sense would prevail to encourage more investment, domestic or foreign.

Same story

Ironically, that was also true of Gujarat, often touted as an economic policy exemplar. The government apparently decided to reduce the price to be paid per unit of power to solar energy producers. The argument was that the cost of production had fallen. Fortunately, the State regulatory commission intervened to remind the government that a contract was a contract and the terms of the power purchase agreements have to be adhered to.

There is nothing wrong in being savvy negotiators, but a contract is meant to make transaction costs predictable. If governments are going to acquire a reputation of considering a contract as the starting point of negotiation (and not the conclusion), it introduces one more element of uncertainty. Businesses would prefer not to deal with such a situation, particularly if they have alternatives -- such as China.

The Vodafone tax case continues to be an example of policy changes that appear to be politically motivated, and create an impression of a banana republic-style of governance. When the Government changes rules in the middle of the game, and applies them retroactively, how do you plan? Our policies on mining licences and telecommunication spectrums must have, by now, made it into the text-books as examples of bad governance, keeping company with the late Hugo Chavez of Venezuela. Need one be reminded of the decision-making mess we made in trying to permit FDI in multi-brand retail? Even knowledgeable observers of the Indian economy are now confused: Is it allowed or is it not?

FIIs are expert at studying and measuring risk; political risk plays a big part in their calculations. But those who are in the FDI game are more busy making and selling their products or services, and do not want to be constantly thinking about and calculating for political risk. Foreign direct investors are here for the long haul. If we don’t take care of them, they leave, and they tell their friends.

Sure, fixing the problems of the sort mentioned above is not going to result in a rush of FDI inflow and stabilise the rupee exchange rate. That is the point: A big bang does not result in FDI inflow. Our ministers thought it did when they recently revised the foreign investment percentages allowed in different sectors, thinking there was a queue waiting at the borders. FDI needs to be courted over a long period through stable and rational behaviour. What we have done is chase them away with a thousand cuts.

(The author is a professor and dean of the Jindal Global Business School, Sonepat, Haryana.)

COMMENT NOW