Confusion confounded

If clarity be the essence of good public policy, the Government of India would fail the most basic of tests. It is not clear if this is deliberate or the result of mental confusion.

What is clear, though, is that it is very unhelpful in achieving stated policy objectives. Consider, for example, the manner in which the government approaches foreign direct investment (FDI).

Ordinarily, the FDI policy of a country is driven by the dynamics of the need to balance two conflicting objectives: making up a shortfall in the domestic savings rate, and protecting domestic capital.

The first objective is driven by economics, the second by the politics of lobbies. Caught between the imperatives of enhancing the larger public good and protecting narrower sectional interests, governments can and do adopt regimes that discriminate between industries.

Sometimes national security considerations are also taken into consideration while formulating policy. US broadcasting law is an example of this, while the restrictive US aviation investment policy is an example of lobby politics.

Few governments, however, draw up the policy in ways that leave potential investors wondering what is what. India is a champion at causing such confusion, as the latest FDI policy initiatives and the sectoral caps they entail show.

Consider the recent relaxations in respect of FDI in banking. Foreign banks can now open wholly-owned subsidiaries in India. Good, but the policy also says that foreign banks already operating in India through branches can acquire a 74 per cent stake in private banks.

Is this going to create two classes of banks, one that can buy 100 per cent and one that can buy only 74 per cent? Perhaps the government will issue a clarification, which in due course will also need to be clarified.

Meanwhile, the business of a cap on voting rights in banks, irrespective of shareholding, remains to be sorted out. No foreign bank is going to buy 74 per cent shares in a bank and be subjected to a 10 per cent voting cap; but if this rule is being relaxed for foreigners, what about Indians? Various proposals have been doing the rounds, but there is no clear answer.

Or take oil exploration and telecom, which provide good examples of lobbies and politics. In the former the government says it is all right for a foreign company to own a 100 per cent stake, but for the latter national security considerations have been cited to say that nothing beyond 49 per cent will be allowed (though companies can circumvent this through pyramiding).

Which leads to the query: isn't oil a strategic commodity and why has national security not been cited there as well? After all, was it not foreign oil companies that held India to ransom in 1962 and 1965, thereby precipitating nationalisation? Alternatively, what is there about telecom that national security becomes such an issue? Between the two, which is of greater strategic importance?

The government has the right to adopt differential policies. But it would help if the inconsistencies in policy are explained; and when it is discovered that some of them are the result of mistakes, there should be speedy rectification.