No critic of the United Progressive Alliance (UPA) government can deny that it has shrugged its lethargy off in the past few weeks. Instead of perpetuating the perception of policy stasis through inaction in many areas that require urgent action, the Union government has initiated several measures for policy change.
A quick look at what all the UPA-II has done in the last few weeks will help elucidate the point. On the question of foreign direct investment (FDI), the government has mustered the courage to allow FDIs in an area in which it had earlier shown extreme reluctance to move even an inch. We are talking about the retail sector.
The National Democratic Alliance (NDA) government of Atal Bihari Vajpayee had allowed the entry of foreign companies in the area of wholesale trade. Even this was opposed by sections of the domestic industry. In spite of that and the political compulsions of protecting one of its original constituencies (read the domestic trading community), the Bharatiya Janata Party-led NDA government went ahead with FDI in wholesale trade. Metro AG of Germany was one of the first companies to enter the Indian market in this sector and is still doing business in a few states, even though it had to cross many political hurdles and many more barriers remain a big challenge.
However, undaunted by political opposition to opening wholesale trade to foreign investment, UPA-I went a step further when it allowed up to 51 per cent FDI in single-brand retail. Like in many other areas, this was the government’s way of telling industry and trade that its plan was to gradually expose them to foreign investment so that they, over a period of time, get ready to face competition. In less than a decade after that decision, the UPA-II is ready with a policy paper that seeks to allow 100 per cent FDI in single-brand retail and 51 per cent FDI in multi-brand retail. Of course, several conditions are being attached and one of them will oblige foreign retail giants to procure at least a third of their produce and raw materials from small companies. But the message is clear. The UPA-II will move on with liberalising the foreign investment policy regime.
In the civil aviation sector, too, the UPA-II is planning to liberalise the FDI rules. The manner and the context in which it is done are certain to raise eyebrows and questions on the real motive behind the proposal. So far, FDI in an airline company was allowed up to 49 per cent equity, but foreign airlines were barred from making investments in an Indian carrier. Even in respect of sensitive sectors, like the media, FDI was allowed up to 26 per cent for the news and current affairs segment, but foreign newspapers or television channels were not disallowed from making an investment as long as it remained below the 26 per cent equity ceiling stipulated under the policy.
If security concerns were cited to disallow foreign airlines from investing here earlier, they were clearly bogus reasons. The real unstated reason was to protect the domestic players in the sector. Now, FDI in civil aviation, even by foreign airlines, is being proposed to be allowed because one of the major private airlines is in grave financial trouble. So, the idea of liberalising the FDI regime in the civil aviation sector draws its sustenance from the crisis in the domestic industry. That, however, should not distract the government. It should instead seize this opportunity and allow at least up to 49 per cent FDI by airline companies and not agree to the 24 per cent cap, as the industry might suggest.
There are a couple of other initiatives the government has taken in the last few weeks. These include the cabinet clearance for the Bill to give the Pension Fund Regulatory and Development Authority, or PFRDA, a statutory status and allow FDI in the sector. The clever move here is that the FDI cap of 26 per cent is not to be mentioned in the main Bill, but in the notifications to be issued later. This has been done to avoid a repeat of what happened in the insurance sector. Just because the FDI cap in the insurance sector was set at 26 per cent under the main legislation, it is a major political task to get the foreign equity cap raised. So, the government has decided to retain flexibility on revising the FDI cap for the pension sector, as in so many other industries.
But the increased activity in policy changes points to an area of concern. Reforms seem to be limited primarily to liberalising foreign investment, as though nothing else matters and reforms in other equally key areas like infrastructure, health and education need no attention. If you raise this issue with the government, it would refer to these proposals for changes in the foreign investment policy and argue that it is no longer suffering from policy stasis. And that kind of an approach is cause for even more serious concern.