S Murlidharan

Our FDI policy is a circus

S. MURLIDHARAN | Updated on July 21, 2013

Let’s clear the clutter and get the investment ball rolling in the mining sector.

The UPA Government refuses to learn its lessons. It had the mortification of putting in place a regime of Indian depository receipts some seven years ago with just one response to show — Standard Chartered Bank.

It somehow believed that just because our companies have been successful in hawking their equity to foreign retail investors, foreign companies too would tap funds from Indian retail investors. Little did it realise that India is a capital-deficient nation looking for foreign funds.

Of a piece was its foreign retail initiative. It may have painted its arch rival, the BJP, into a corner for the moment, but it ought to have realised that foreign capital refuses to come where there is uncertainty. And the fear of BJP and other opposition-ruled States asking them to close shop has always been lurking in their minds — as a result of which not one big foreign retailer has shown interest, though it is going to be close to one year since the doors were opened.

To be sure, foreign retailers have been seeking clarifications all these days, trying to make sense of the legalese.

Circumventing norms

Would the 50 per cent back-end investment norm be applicable to subsequent investments?

The Government has said ‘no’ and this is likely to be seized with promptness whenever they decide to set up shop. They might bring in the minimum $100 million and 50 per cent of that may be deployed in back-end infrastructure, even though in their minds investment of $500 million was envisaged.

Cleverly, they would bring in $400 million as the second portion of instalment, which would not be subject to the back-end investment norms.

Even this they would do only after the 2014 general elections are over, just in case. Wouldn’t it have been so much better if the Government had imposed export obligations on foreign retailers?

To be more specific, they might have been told that 50 per cent of what they gross from India by way of sales must be matched by revenue in hard currency from abroad.

This would have not only addressed the fear nursed in some quarters that Wal-Mart, which views the world as its oyster, would rather import than purchase the bulk of its wares from India.

This is because, whatever they do, they have to bring in 50 per cent of the domestic sale at least as revenue from abroad. Likewise, back-end infrastructure should include in its sweep food processing industries. Foreign retail chains back home are quick to prevent wastage.

Milk removed from shelves are pronto converted into ice creams and yoghurts that have a longer shelf life just as fruits are converted into jams and juices before they start rotting. Himachal Pradesh had the embarrassment of seeing as much as 40 per cent of its apples lost to the elements.

If a foreign chain wants to set up a jam or juice factory, so be it — it should be taken as sufficient compliance with the back-end investment norm.

Shale gas option

The recent hike in certain sectoral caps for FDI, for all one knows, is not going to set the nation’s cash registers ringing with foreign equity capital pouring in.

It is just plain bravado to hike the FDI in insurance limit to 49 per cent from the present 26 per cent, because unlike the FDI in retail limit, the limit of 26 per cent is contained in the Insurance Act, amending which would be a tall order, given the animus between the Government and the Opposition. Mukesh Ambani might be scouting for shale gas in the US but what about shale gas back home?

In the US, especially in California and Texas, people are fracking for shale gas in their backyards, literally. Such is its abundance in that country that the US is now in the happy position of beating its arch rival Russia as the largest producer of gas, and exporting to the UK and other countries. Intuitively, India too must be sitting on a lot of shale gas, given the huge deposits of sedimentary rock.

Fecund source

To break free of dependence on imported oil, our policymakers have been alive to this possible fecund source.

The Government ought to have invited explorers from abroad, allowing them 100 per cent equity, subject to their sharing 50 per cent of the gas with the Government of India.

Of course, it may have to reckon with the naysayers, especially environmentalists, who would try to scuttle the move saying fracking deep underground might cause earthquakes, a fear that is not exactly unfounded.

Murli Manohar Joshi, the BJP veteran and Swadeshi ideologue, coined the slogan: computer chips, not potato chips in the context of welcoming FDI. He was lionised or demonised, depending upon which side of the political divide you were. But the truth is the Government can imaginatively use its FDI policy to channel investments into the desired areas. Minerals are one area where we are out of our depth.

We have all along been resorting to open cast mining of coal, in keeping with our trait of plucking the low hanging fruit. But going into the bowels of the earth calls for greater investment and cutting edge technology.

We must welcome FDI in coal mining with a view to obtaining these twin advantages. The quality of coal gets better and better deep inside.

The production-sharing agreement should leave enough for the foreign miner to get him interested.

(The author is a New-Delhi based chartered accountant)

Published on July 21, 2013

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