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TALK OF REFORM

Share prices of public sector undertakings have taken a beating, following postponement of the privatization decision of Hindustan Petroleum Corporation Limited and Bharat Petroleum Corporation Limited. This negative fallout must have been expected. Why else would the government pick the same day to release the report of the steering group (the N.K. Singh committee) on foreign direct investment' India’s FDI inflows may have perked up to 4 billion dollars in 2001-02. But this is still some distance from the 10 billion target, or the 8 billion mentioned in the tenth plan. India’s present FDI policy is liberal only for manufacturing. Sectoral caps exist for most services and FDI in agriculture is prohibited. Globally, most FDI is service-sector oriented. That apart, most global FDI is through mergers, takeovers and acquisitions. India has restrictions on these, friendly or otherwise. The N.K. Singh committee’s recommendations should be viewed in this light. While the recommendations suggest further liberalization, the sectoral caps proposed continue to suggest arbitrariness.

FDI up to 49 per cent (from the present 24 per cent) will be allowed in items reserved for the small-scale sector. Hundred per cent FDI will be allowed for private banks and investing companies, petroleum refining, oil marketing, real estate, advertising, trading, radio paging, airports, oil and gas pipelines, coal washeries and some mining ventures. It is paradoxical that 100 per cent FDI should be allowed for oil refining, exploration and marketing, when the non-privatization of HPCL and BPCL was partly explained in terms of oil being a strategic sector. However, FDI in tea plantations will be reduced from 100 per cent to 49 per cent and the retail sector will not be opened up. As Mr N.K. Singh well knows, such sectoral variations are at best arbitrary. There is no convincing argument against opening up FDI across the board to 74 per cent, including retailing. More importantly, markets realize that the HPCL/BPCL privatization would have been an actual decision. Unlike that, the steering group only offers recommendations. To speed up clearances, there is a proposal to enact an FDI promotion law and further empower the foreign investment promotion board and the foreign investment implementation authority . Once more and more sectoral caps are raised, these items move to the automatic approval category and the FIPB becomes irrelevant. As for FIIA, it is relatively powerless to influence what happens at the state-level and most procedural hurdles and clearances are at the state-level. This explains why the inflow to approval ratio varies widely from state to state.

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