FDI Controls in India – what are they really about?

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.

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8 Responses to FDI Controls in India – what are they really about?

  1. Pingback: Blogbharti » Why should newspapers be protected in any way?

  2. A.Ramanathan says:

    I agree with you that Cap of FDI limit is ridiculous.
    If foreign MNC would like to Invest in India,except in Sectors like Defense,Atomic Energy,then why not.
    After all they are going to ultimately create jobs for Indians only.You may have a few expats here and there in the Management level.Even the Co doing Gargage clearance in Chennai is part of a European MNC Vivendi and employs couple of thousand Chennaiites.
    The funny thing is that with all this bro ha about FDI,even today the GOI does not know who are the real owners of Jet Airways.This was clearly stated by Arun Shourie in Parliament during the NDA govt.

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  3. Dheeraj says:

    On the magic numbers :

    49% is, as you rightly say, to prevent majority control.

    26% and 74% are the threshold numbers (above or below which) that enable you to approve or prevent “special resolutions” – the really meaty ones – at company AGMs. I speak on this from what is commonly known.

    Which clause of the Companies Act deals with this? I don’t know. I’m not a legal person. Maybe somebody can elaborate.

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  4. Brinda Adige says:

    FDI in retail market especially in a country like ours, will wipe out small shops and kirana owners say in about 10 years time (maybe sooner). At the most how many jobs will such giants create and for what category of people? The giants will then have no competition at all and can name the price they want to buy a product from either the producer or even the farmer (or even become the producers indirectly). Why do we not press for “good goverance” from our elected representatives? intelligent debates on economics or rather the politics of economics alone will not ensure fair livelihood for all.

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  5. I won’t quite agree with you on this one Basab. Taking the same example as yours, I know how much SunTV was able to sway its voters for the recent elections by their campaign of highlighting free goodies. In fact, Dayanidhi Maran appears on Sun News every day for some reason or the other. Your point of people coming to know of bias can only be said of educated indians. An a majority of the people read local language newspapers and get easily influenced by the topics. A writer can twist or turn facts as and when he wants

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  6. Basab says:

    Radha, you are correct. TV seems to receive less skepticism compared to newspapers. Perhaps a combination of seeing pictures vs. just words, and the fact that newspapers are generally read by the well educated and well informed, around the world.

    Brinda, I heartily disagree with your pov. Dislocation of jobs is not the same as net job loss. Many technological advancements come at the cost of dislocation of jobs (powerlooms). But to bar the progress of technology or business models because of short-term dislocations is short-sighted. Your second point about pricing power shifting to large retailers is plausible but would be truer if marginal farmers today had any pricing power in the first place.

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  7. Krish says:

    Brinda,

    It’s not the poor Kirana storewallas who are against FDI in retail, it’s the Indian Retail giants like Big Bazaar, Rahejas, Nirmal etc who are frowning. Their outwardly bravado aside, ( based on their knowledge of local ethos, logistics and their homegrown buying efficiencies in keeping the prices low – which cannot be threatened by Wal-Mart ) all of them squirm at the hint of FDI in retail. As for the poor kiranawallah, organized retail by itself is competition, since he does not know the difference between local money and FDI.

    In fact, Indian retailers are not so much worried about a Wal-Mart snatching their market share. They are worried about their perceived loss of pricing power later (as the fad catches on) between a few big players.

    The kiranawallah’s doesn’t deserve your mercy either -up until now he used to harm your health by mixing inferior quality anything-that-looked-like with all that you bought from him at seemingly affordable prices. He did it with grains, lentils, edible oils and even milk that you fed to your children. You had your share of ill-health thanks to his `strategies’ of unjust enrichment.

    If you had noticed, it happened across Cement industry during 2004-05, when the Commerce ministry had to intervene to break the Cement Cartel ramping up prices to very high levels.

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  8. deepak says:

    Regarding FDI restrictions. Have mixed feelings about this one. Why is it important???
    You have indicated (and some people do agree) there should be some sectors which needs to be insulated defence, sattelites, atomic engergy, which are suppose to be self-gaurding national intersts.
    Most of the sectors have restrictions keeping the same in mind – national interests. Imagine if the oil sector was not protected.. there would have been no ONGC, BPCL, HPCL .. and indeed no subsidies.. probably we would be paying Rs 100/ litre of petrol ..which for most of citizens in India is unaffordable .. (not that Rs55 is affordable)..
    Now coming to media… Media is one of the most influential mediums and having a totally autonomous foriegn body controlling the management will have a major impact in a country like ours, as people are not mature enough to assimilate information, analyze and judge. It is just mass histeria which guides their decisons and hence it would be goo d to impose restrictions to FDI. I also am totally against politicians having huge stakes in Media companies and influencing people.
    Retail – This is very much clear that the protection is for the ambanis, the ruias, the mittals rahter than the Kirana stores, which is just a face-saving tactic.

    In short, restrictions have both helped and marred Indian economy. Now that we have real economists at the helm of affairs we can hope things will improve.

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