In the budget, the finance minister promised hikes in sectoral foreign direct investment equity caps for telecommunications, civil aviation and insurance, implying placing these on automatic approval and rendering Foreign Investment Promotion Board clearances unnecessary. Since insurance is stuck, the government wishes to convey its reform inclinations by targeting telecom and civil aviation. The finance minister said as much on his visit to the United States of America, although on their respective US visits, both the prime minister and the finance minister also pitched for FDI in infrastructure. Proposals to hike FDI caps in civil aviation are not new and in September 2002, the N.K. Singh committee argued for a hike in the cap from 40 per cent to 49 per cent. So did the Naresh Chandra committee in December 2003. It is indeed significant that the United Progressive Alliance government has been able to push through a proposal stuck across several governments, given the opposition of some existing players, and the present liberalization includes 100 per cent automatic approval permission for non-resident Indians and overseas corporate bodies. The hike to 49 per cent is inclusive of foreign institution investors? holdings. The left has also accepted the idea.

However, one should not blow out of proportion what has been done. Both Mr N.K. Singh and Mr Naresh Chandra desired direct and indirect equity participation by foreign airlines. The budget speech was not clear on this. However, subsequently, the finance ministry wanted this too to be done and the left?s acceptance is explained by foreign airlines being prohibited from investing in air transport services. Consequently, Mr Praful Patel?s protestations notwithstanding, manna will not fall from heaven as a result of this hike, although relatively new entrants like Air Deccan will obviously benefit. Indeed, because of the prohibition on foreign carriers, there have not been any significant increases in FDI in civil aviation, after the hike to 40 per cent two years ago.

Despite this major caveat, there are three reasons why the liberalization is welcome. First, there is a message about commitment to reforms. Second, flowing from this message, lobbying against liberalization by existing private players has been resisted and relatively new entrants will gain, thus encouraging competition. Third, privatization of Indian Airlines may become easier. There is an analogy with another decision taken by the cabinet committee on economic affairs on the same day. Onions have been removed from the Essential Commodities Act. That may bring fewer tears to the eyes, but the bulk of ECA still remains. Ditto for constraints inhibiting FDI. The finance minister?s dream of scrapping the FIPB and placing everything on automatic approval is still a distant one.