DIPP note: American cos push for liberal FDI environment

American companies across sectors have upped the ante on liberalising the foreign direct investment climate in the country, even as the US Secretary of State, Ms Hillary Clinton, comes calling.

“We strongly believe it is in India's long-term interest to continue to boost foreign investment by liberalising rules on equity caps, investment reviews and other provisions that have impeded India's ability to attract even more foreign investment over recent years,” said a group of 14 industry associations in a letter to the Department of Industrial Policy and Promotion (DIPP).

Industry officials close to the development told Business Line that Ms Clinton's visit would focus on security, Defence and nuclear issues. However, there would be track II discussions on liberalising the FDI environment and intellectual property-related concerns, he added.

Responding to a DIPP discussion paper on the FDI Policy-Rationale and Relevance of Caps, the associations reiterated the role played by foreign investments in promoting a more open business climate, building technologies and advancing employee training, besides helping Government revenue to grow.

The objective of the DIPP exercise was to examine if some elements of the FDI policy needed a review. The FDI policy caps equity at 26, 49, 51 and 74 per cent. The Government is faced with contradictory situations – from whether it needs to open FDI in multi-brand retail to whether it needs to cap overseas activity in the pharmaceutical sector. The sale of a series of local drug operations to multinationals had raised concerns on its impact on medicine prices.

FDI flows into India had increased over 10 years from $3.6 billion in 2000 to $40.4 billion in 2008, despite the global recession, the DIPP said. China, Russia and Turkey have witnessed similar growth.

When compared to 2009, FDI in 2010 grew by 6.3 per cent in China, 2.6 per cent in the Russian Federation, 161.2 per cent in Indonesia, 400 per cent in Malaysia, and so on. “Though the FDI base is small for some of these countries, the positive direction of growth is unambiguous. India, however, is the only major country in South Asia where FDI inflows have fallen during 2010. Why this has happened is the question that needs to be addressed,” the DIPP paper said.

Responding to specifics such as equity caps or mandatory listing for multinationals, the associations said: “There is a very strong likelihood of substantial growth in foreign investment once caps are phased out and eliminated as companies increasingly want to exercise greater day-to-day control over their investments. Complicated rules and definitions on equity caps, methods of entry and conditionalities inject a great degree of uncertainty into the economic environment, having the ultimate effect of slowing and potentially halting further foreign investments.”

Supporting narrowly targeted, sector-specific conditions based on transparent criteria, the associations said: “For sectors where equity caps currently exist, we would recommend that those be removed and any apprehensions be addressed through targeted means that do not restrict beneficial investment in a discriminatory or unfair manner. For sectors in which no equity caps currently exist, we strongly discourage imposition of such caps. A move in this direction is incongruous with the Indian Government's interest in promoting investment and accelerating economic development.”

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