More sops for the elite

Following up on a series of decisions that dismantled capital controls, the Union Finance Ministry announces liberalisation of regulations governing commercial borrowings by Indian companies from overseas markets, apparently as a further sop to a certain constituency.

THIS is truly a season of sops. Union Finance Minister Jaswant Singh's mini-Budget, which effectively loosened the purse strings of the public exchequer to further the cause of the Bharatiya Janata Party-led government's electoral agenda, has been followed by a volley of policy announcements aimed at wooing the rich and the powerful, not only in India but also overseas. As election-eve sops go they are not only unprecedented in scale and scope, but in the constituencies that they explicitly target. Hitherto election-eve sops were generally aimed at the masses. To woo the electorate, sops such as cheaper sugar or kerosene or free dhotis and sarees were the norm. In a break from the past, the government, in what appears to some commentators to be a high-stakes gamble, has stacked its sops in favour of the rich and the powerful.

If the first set of measures were aimed at the upper middle classes, the subsequent announcements have been targeted at business interests. While Indian big business is obviously a beneficiary of these sops, the interesting aspect of the policy pronouncements is that it addresses the demands of foreign investors on the eve of the elections.

In a series of announcements, the government effectively rolled back the controls on foreign investment in crucial sectors of the Indian economy. Limits on foreign direct investment (FDI) in crucial sectors such as petroleum and gas, telecom and banking have been virtually dismantled. Following up on the dismantling of capital controls, which was part of the earlier package announced by the Prime Minister, the Union Finance Ministry announced a dramatic liberalisation of regulations governing commercial borrowings by Indian companies from overseas markets on January 19.

Although foreign companies, with an eye on the Indian insurance business, have been asking for higher investment limits in Indian insurance companies, the government realised that the legal framework impaired its ability to accommodate their interests. Nevertheless, Union Minister of State for Finance Anandarao Adsul promised that "the increase in FDI limit or the issue of a comprehensive Bill on the issue may be taken up after elections". Existing rules limit FDI in the insurance sector to 26 per cent. The hike in the limit for the insurance sector will also require amendment in the Insurance Regulatory Development Act (IRDA). Although the Department of Industrial Policy and Promotion had proposed to raise the FDI limit in the insurance business, the Cabinet has not approved it yet. Business interests have been actively lobbying for the limit to be raised to 49 per cent. It is evident that the government has been unable to push ahead with the move because of the strong countervailing power exerted by the trade unions. Observers have pointed out that the relatively strong unionisation in the industry has deterred the government from moving ahead with reforms in the sector.

THE loosening of the controls on FDI in the petroleum sector means that foreign investors can now enjoy complete ownership by holding 100 per cent of the equity in projects across the entire production chain in the sector. Foreign companies can now be involved in oil exploration, refineries, marketing and pipelines in both natural gas and liquefied natural gas (LNG) projects. More significantly, the government has also loosened restrictions by allowing them to get "automatic" approval, instead of having to route their applications through the Foreign Investment Promotion Board (FIPB). Critics have pointed out that the government, by choosing to liberalise the terms of entry for foreign companies, has compromised national strategic interest in the energy sector. A senior officer in the state-owned Hindustan Petroleum Corporation Ltd. (HPCL) told Frontline that the government's proposal to allow 100 per cent FDI was unlikely to have any immediate impact on the refinery sector. He said that the refining capacity in India - about 115 million tonnes per annum - was already in excess of demand and was likely to be so for some time to come.

Foreign companies have been lobbying to relax controls on FDI. Although N.K. Singh, Member of the Planning Commission, who was asked to submit a report on the norms for foreign investment submitted it to the government in August 2002, the government chose to act on it now, when it prepares to face the electorate. It is significant that such a contentious issue, which industrial houses have themselves lobbied against off and on, is being pushed ahead. Although the norms governing FDI have been relaxed over the years, they are way below the target of $10 billion fixed a decade ago. Investments through the FDI route amounted to $4.66 billion in 2002-03 and in the first seven months of the current financial year they amounted to just $2.22 billion. Indeed, a leading chamber of commerce observed recently that this "shows some signs of a slowdown". However, inflows of "hot money", through portfolio investments, mainly for investments in the stock markets, has increased by $0.98 billion in 2002-03 to $5.16 billion in the first seven months of the current fiscal.

JASWANT SINGH also announced sops to foreign banks. Foreign banks are now to be permitted to establish wholly-owned subsidiaries in India. Although he had announced his intention to increase the FDI limit in private banks in India from 49 to 74 per cent, he has chosen to act on that proposal just weeks before he is to present his vote-on-account in Parliament. Foreign banks already operating in India can own to the extent of 74 per cent of the equity in entities running the Indian operations. However, new entrants can establish wholly-owned subsidiaries in India. Obviously, this will create anomalies and realising this, the Finance Ministry has promised further clarifications. Critics of the government have pointed out that the move is likely to destabilise the Indian banking system. Although foreign entities' voting rights continue to be restricted to the extent of 10 per cent in board rooms of the private banks, industry observers have pointed out that limits or controls on FDI tend to get scaled down or watered down under relentless pressure from foreign lobbies.

The All India Bank Employees Association (AIBEA) was quick to demand a reversal of the government decision to allow higher limits for FDI in banking. It said that the economy would be weakened by the move. It has also threatened to launch protests against the decision. It said the foreign banks in the country were violating the laws and "exploiting people" through contractual employment. The AIBEA pointed out that several foreign banks were involved in the securities scam and that the Joint Parliamentary Committee (JPC), which investigated the massive fraud, had recommended cancellation of their licences.

The government has drawn criticism for employing different standards in different sectors. Interestingly, while the government chose to allow 100 per cent FDI in investments in the petroleum sector, which has obvious security-related implications, it has cited this very reason to limit FDI investment in the telecom sector to 49 per cent. Critics allege that powerful interests in the telecom sector have ensured that the FDI limits are lower in the telecom sector. The Group of Ministers (GoM), headed by Jaswant Singh, had earlier suggested that the foreign investment cap for this sector be raised from 49 per cent to 74 per cent by allowing an additional investment limit of 25 per cent for foreign institutional investors. There have been reports that the Cabinet failed to take a view on increasing foreign investment limits in the telecom sector because of security concerns raised by some Ministers.

The Department of Telecommunications (DoT) has also recommended to the Cabinet that companies seeking infusion of equity capital in their ventures should issue fresh equity instead of merely selling a portion of their stake to foreign companies. This would ensure that Indian entities would not lose control of their companies. However, the issue is not as simple. The point is that the latest measures need to be seen in the context of the ad hoc manner in which government policy has allowed erring companies to seek government protection. For instance, it is well known that Bharti Telecom, a leading mobile service provider, has accumulated huge losses after having deployed its mobile and landline facilities across the country. Companies providing mobile phone services have already benefited from the transition from the licence fee regime to a revenue-sharing arrangement, entailing huge losses to the public exchequer. It is also common knowledge that Bharti and some other entities are banking on fresh investments, via equity, by foreign entities to leverage their debt.

Barely months after the government introduced controls on overseas borrowings by Indian corporates, it has changed tack. The initial move was seen as being sensible because it eased the pressure on the rupee, which has been steadily rising against the dollar. The government's fresh announcement, made on January 18, has placed all external commercial borrowings by Indian companies on the "automatic route", subject to a restriction of $500 million. Although this is likely to enable Indian companies to access cheaper credit from overseas markets, it is also likely to place more pressure on the bottom lines of Indian banks. It has been pointed out that despite the report of the economy being on an upturn, the banking sector, though flush with funds, has been unable to increase credit offtake. Having to contend with cheaper interest rates offered by overseas lenders is likely to affect the profitability of Indian banks.