The Telegraph
Since 1st March, 1999
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Ministry tests waters on FDI cap hike

New Delhi, Oct 23: The finance ministry is planning to once again take up the issue of liberalising the policy on foreign direct investment (FDI), but will now tread carefully.

A note prepared by the ministry says that it will be seeking to raise the FDI caps in only telecom, financial services and banking sectors, besides asking for faster power reforms which is expected to spur foreign capital flows.

Top officials said the ministry will not immediately reopen the case for hiking the FDI limits in insurance and aviation sectors, but would wait for a longer period of time to try and mobilise opinion in favour of such a move.

It wants to increase the percentage of foreign equity allowed in banks from 49 per cent at present to between 51 per cent and 74 per cent. In the case of financial service companies however, it wants to allow a higher percentage — between 74 per cent and 100 per cent. The N. K. Singh committee on FDI had recommended 100 per cent FDI in these sectors.

In the case of power, the ministry will be pushing for faster policy and regulatory reforms, especially in the areas of user charges, reduction of theft and greater private entry into distribution. It will also push for privatisation of existing generating capacity and more open access to transmission-distribution networks.

Consequently, it has also recommended in a working group report high FDI targets for the three sectors. The ministry hopes that they will together garner about $ 3 billion a year over the next few years. In fact, it feels that with changes in FDI norms, the three sectors will be the top grossers in the FDI sweepstakes.

The report states that it expects $ 1.2 billion to flow into the telecom sector on an average every year, $ 1 billion into power and $ 800 million into financial services. This is far higher than LNG and oil exploration, which is expected to attract only $ 600 million, and software and IT enabled services ($ 500 million) — the top three sectors attracting FDI investments in the 1990s.

Objections from the civil aviation and home ministries to hiking FDI in aviation — both domestic airlines and airports — on security considerations had stymied earlier efforts to throw open these sectors in a bigger way.

The BJP party top-brass is also not in favour of plans to raise FDI in insurance companies.

The N. K. Singh panel wanted FDI in insurance hiked to 49 per cent from the current level of 26 per cent, but party leaders are against this as they feel this would mean effective control of much of the insurance and the huge funds it commands in the hands of global multinationals who could then virtually dictate the way long term investments are made here. They fear a hasty decision in this regard could hit the party’s chances at elections to state assemblies coming up early next year.

Even when insurance sector was being thrown open a few years back, BJP MPs had virtually revolted against the Vajpayee-led Cabinet’s decision to allow a stake higher than 26 per cent in insurance companies. It had ensured a very strict interpretation of the term ‘Indian ownership of 74 per cent’ to ensure that foreign holdings beyond the 26 per cent limit do not creep in through the back door.

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