From time to time you hear some government minister or bureaucrat in Delhi making a proclamation that the FDI limit (Foreign Direct Investment) on such and such industry has been raised from X% to Y%. The press dutifully covers it, the Communist parties huff and puff about it and another credit is chalked up on the Indian government’s liberalization scoreboard. But most people like me, remain uninformed about the issues behind the decision.
Annexure 2 (page 52) of this document gives the sector specific guidelines for FDI in operation. The guidelines are complex and uniformly inexplicable. A case study in how any bureaucracy, left to itself, will create a maze of rules that makes them indispensable to anyone who wants to get to the other side.
I am going to take an example here and try to divine the reasons why the FDI rules are what they are. Let’s take the example of media – specifically newspapers. The guidelines for allowable FDI in this sector read as follows:
FDI up to 26% in publishing News Papers and Periodicals dealing in News and Current Affairs subject to verification of antecedents of foreign investor, keeping editorial and management control in the hands of resident Indians and ensuring against dispersal of Indian equity.
Here are the questions that spring to mind after reading this delectable piece of prose:
Why should newspapers be protected in any way? A plausible argument could be that the government does not want public opinion in India to be influenced by a newspaper owned by a company that is controlled by a foreign country.
In today’s India when people get their news from the TV, radio and internet oftener than they do from a newspaper I wonder if one should worry about one stray newspaper controlled by a company that is headquartered in say London. Before worrying about a ‘foreign hand’ in forming public opinion, the government should worry about the totally biased coverage by channels like JayaTV or SunTV, which are nothing but political mouthpieces. Actually, let me correct myself. The government should not worry about this either. Poor, biased content is likely going to be discounted, ignored or discarded as the people in Tamil Nadu are doing to the news from these two channels.
Let’s say, by some stretch of plausibility, we agree that there is a good reason here to restrict FDI, why is 26% allowed? Why not 0% or 49%? I don’t have an answer to that. Actually, throughout the FDI controls regulations, you’ll get these magic numbers 26%, 49% and 74%. I think I understand why 49% is 49% – perhaps something to do with majority control of the company – but have no idea what 26% and 74% signify. Perhaps below 26% ensures that the foreign entity is not a significant shareholder and perhaps below 74% ensures that there is at least another significant shareholder. Who knows?
More questions about FDI in newspapers. What does ‘verification of antecedents of foreign investors’ mean? I guess there is another Book of Guidelines somewhere else in the labyrinth, that we do not know of. For now, it will remain a mystery. I am equally nonplussed about the rest. I guess it is possible that a foreign company will invest 26% in an Indian newspaper and then decide to cover local news from London – kind of like a reverse BPO thing. And then there is the ‘ensuring against dispersal of Indian equity’ clause. I think what this gem of a phrase means is that the other 74% that is not owned by the foreign company is largely owned by large business houses whose names begin with…oops how did that get into the guidelines!
FDI controls are the new form of license raj. They protect the incumbents and thus allow Indian business houses to expand their profits with far lower competition than if there had been foreign companies in the fray. The complex, ever-changing rules provide politicians opportunities to collect rent from the parties who seek to change them as well as those who want them to remain unchanged.
There are many sectors where FDI controls are desirable – defense, satellites and atomic energy, for example. These relate to national security and/or are too sensitive to allow foreign corporations in on. Beyond a few hand-picked Indian companies these should be the preserve of the government. Railways are in the government sector and we obviously can’t allow FDI in the rail transport sector before we open it to the domestic private sector.
But if you look at something like retail trading, which is extremely important for India, to be able to spread the benefits of growth to the hinterland, what justifies keeping foreign investment out? If you are a nationalist and think that the government should tilt the field to help local companies first, I would disagree with you on two counts. One, the goal of employment generation, growth and other economic benefits greatly outweigh the debatable benefits of helping Indian business houses. Two, once retail trading is opened up to FDI in larger measure, I can assure you that many of these business houses will be selling out to foreign retailers for a nice chunk of change. It’s business after all.
Here’s another classic one to leave you with:
FDI up to 100% permitted for e-commerce activities subject to the condition that such companies would divest 26% of their equity in favour of the Indian public in five years, if these companies are listed in other parts of the world. Such companies would engage only in business to business (B2B) e-commerce and not in retail trading. FDI is not permitted in retail trading activity.