FDI, FII distinction set to be removed

Foreign Investment Cap should be Fungible for both: FM.

Finance Minister P Chidambaram today indicated further liberalisation of the rules governing foreign investment and said the government was likely to announce an increase in the investment limit in domestic airlines this month.

Addressing mediapersons here after an interactive session with investors, including merchant bankers and non-resident Indians, Chidambaram said he was increasingly convinced that the sub-ceilings for foreign direct investment (FDI) and foreign institutional investment (FII) might no longer be relevant and that he would address the issue on his return to India.

"If a cap exists, it should be fungible for both FDI and FII. I will take a look at this issue when I get home," he said.

Asserting that the Left parties were not ideologically opposed to FDI, the minister said the caps in telecommunications, insurance and airlines would be raised over time.

"We hope to be able to announce the hike in the cap in the domestic airlines sector within this month," he said, adding that the proposal was to raise it to 49 per cent from 40 per cent.

While the government had already notified allowing 74 per cent FDI in Indian private banks in March this year, Chidambaram said Prime Minister Manmohan Singh had in Washington clarified that foreign banks would be allowed to acquire 10 per cent equity in Indian banks every year so that they could acquire control over a period of 4-5 years.

He added that during this period there would also be consolidation in public sector banks and Basel II norms and periodic regulations would be put in place.

The finance minister also said India was committed to reducing import duties to Asean levels.

Admitting that the spurt in oil prices and the deficit in monsoon were causes for concern, Chidambaram reiterated that there was no knee-jerk reaction to it.

"The government and the central bank are both on record saying that measured steps on the fiscal and the monetary sides will be taken to control inflation. Some steps have already been taken and more will follow if required."

"I hope that the oil prices will moderate," he said, adding that the government was considering various measures, including stepping up the domestic production of oil and gas, looking for alternative fuels and contemplating energy conservation measures.

Asked about the discussion with the World Bank and the International Monetary Fund, the minister said both the issues of voice and quota allocation would have to be addressed.

"India has been growing at a sedate pace and it had lost some percentage in the quota formula. But now that the country is growing at a brisk pace, the quota allocation should be reviewed and enhanced. Developing countries should have a greater say in the fund and the bank."

Responding to a query about India's huge fiscal deficit, he said the present government was committed to the goals in the Fiscal Responsibility and Budget Management (FRBM), under which the revenue deficit would be removed by 2008-09.

"We have set a 4.4 per cent fiscal deficit target for the current fiscal year. But there are external factors beyond our control like the spurt in oil and commodity prices that can impede our progress towards the target. We will correct ourselves," he added.

On the issue of business process outsourcing, the minister said the backlash was exaggerated and the rhetoric would die down after the elections were over in the US.

"The US business supports outsourcing," he said, adding that areas such as health care had huge potential for India as future growth areas of outsourcing.

The minister said he wanted foreign investors to invest in the infrastructure sector in India, including telecom, power, ports and roads. "Although they are no targets, I would like $40 billion in telecom and $10 billion in power every year for the next 10 years," he said.

Agencies add: Warning that oil price pressures would pull down economic growth prospects, Chidambaram today pegged the GDP growth to be lower than the earlier projection of over 7 per cent this fiscal.

"Our growth rate ought to have touched and, perhaps, exceeded 7 per cent. But I am afraid if oil prices rule at this level we will have to be content with growth of 6-7 per cent," Chidambaram told the BBC.

FM's London diary

WISHLIST

• $40 billion in telecom, $10 billion for power every year for the next 10 years
• An increase in the investment limit in domestic airlines from 40 to 49%
• Reduce import duties to Asean levels soon

TACKLING THE LEFT

• Left is not philosophically against FDI. Communist-ruled Bengal has sought World Bank expertise

TRADE WITH PAKISTAN

• We are going for trade deals with all South Asian countries. It is Pakistan's choice if it wants to be left out

WARNING BELLS

• If oil prices rule at current level, only 6-7% growth is possible. Not enough
• Each $5 hike in oil translates into a 0.5% drop in growth and a 1.4% increase in the inflation rate