Should the FDI cap in telecom be raised?

Ernst & Young

Are security concerns a justification for not raising the foreign investment cap in telecom from 49 per cent to 74 per cent? The answer is an emphatic no. Security concerns can be addressed through other alternatives.

For instance, specific technology is available that will allow the government to monitor and control surveillance. There is an urgent need to delink security from foreign investment policy.

The government has increased the foreign investment cap in other sectors like power and banking that are equally strategic, so why is telecom being singled out, that too at a time when the sector is poised to take off?

So far the telecom story in India has been a successful one. We have overtaken the teledensity targets set by the government by almost two years. We are on track to achieve teledensity targets of 15 per cent by 2010.

In fact, I see a teledensity of 20 per cent by 2007. All this has been possible because of the reforms carried out by the government in introducing more competition. But now the sector has reached an inflection point where the government must give an impetus to the sector by allowing higher foreign investments.

Two-third of the Indian telecom market is yet to be tapped. In our estimates the sector would need around $ 20 to $ 25 billion in the next five years to keep up with the phenomenal pace in growth.

While we have settled the most thorny issue over limited mobility, the government must create an environment that will make it conducive for foreign investors to return to the Indian market.

This will enable Indian resources to be redeployed in other segments. If you have a larger corpus of investments, it will spur further growth of the economy.

The current foreign direct investment (FDI) policy, which allows for 49 per cent foreign investment and a multi-tiered structure, has its own limitations.

While we created a lot of enthusiasm among foreign investors initially, more than 80 per cent of the companies have pulled out since then, be it Bell Canada, British Telecom, AT&T or Swiss Telecom, to name just a few. So far, we would have got foreign investments to the tune of $ 2.5 billion to $ 3 billion. But this nowhere near international standards.

An increase in the FDI cap to 74 per cent will have two major benefits for the sector. First, there are a number of telecom companies that are preparing for an initial public offering (IPO), like Hutch, Idea and Tata Teleservices.

Seventy-four per cent FDI would make these IPOs successful and would allows these companies to replace debt funds with equity. Given that the valuations are looking up, this is the right time to capture the opportunity.

Second, it would allow companies to do capital restructuring by collapsing the existing multi-layered structure. This would also enable smaller companies to consolidate their businesses without legal complexities and lend greater transparency to the financial structure for lenders and institutional investors.

To answer critics that a hike in FDI cap will not bring in much funds, I would say that while in the short- to medium-term, an increase in FDI would benefit existing players giving them a platform for infusing foreign investment smoothly, in the medium- to long-term, this may also attract newer players.

We have seen it happen in other telecom markets and there is no reason to believe that it won't happen here. Let us not shut the door. Instead, let us provide for a framework that will spur growth in a capital-intensive, technology-driven and fast-growing sector like telecom.

Murlidhar Rao
Convenor,
Swadeshi Jagran Manch

It is interesting to see protagonists of globalisation squirming over the US decision to ban business process outsourcing (BPO). Will they go to the US and teach them about opening up the market?

In fact, globalisation could not withstand even BPO, which is hardly significant in economic terms for a country like the US. But the US administration turns out to be protectionist whenever it suits American needs.

What we have been advancing as an argument is very relevant in this context. You cannot open up the Indian market to foreign capital without caring for national interests. Investment is the still an open issue in the World Trade Organisation (WTO) negotiations.

Was it not correct for the Indian government to oppose the investment issue at the Cancun meet? It did oppose investments to the hilt and claimed credit for stalling the negotiations.

But it is strange that the government is going ahead with opening up sector after sector to foreign direct investment (FDI) without discussing the issue at the WTO.

This is a clear case of running with the hare and hunting with the hound. I do not hesitate to say that the government's FDI policy has become a captive of an unholy nexus of vested interests "" politicians, bureaucrats and corporations. And they are not even remotely related to public good.

Our opposition to foreign investment must be seen in this context, and not as an ideological dogma. I have no objection if Bill Gates makes investments to upgrade Indian technological skills.

The Swadeshi Jagran Manch (SJM) has never raised objections if FDI can be used for improving infrastructure. But what is being done in the name of attracting FDI is nothing but mortgaging our collective interests to foreigners.

If one has to identify the necessities for attracting FDI, the immediate reason is to help the Indian economy. Obviously, FDI is required when large investments are required and there is a dearth of money in the nation. In the Indian context, foreign investment has played a marginal role when it comes to helping the overall economy.

The second reason for inviting FDI is to import technology that comes with foreign capital. We have never opposed this kind of FDI, but it rarely comes to India.

The third reason for FDI is to generate employment growth in order to take care of social inequities. None of these objectives is being fulfilled by FDI.

To my mind , the real motive behind FDI is to open up every sector of the Indian market to foreign investment as per the dictates of the WTO. This investment regime will not be able to protect our national interests.

Our insistence has always been to control the productive process in order to make the country self-reliant. For instance, it will be detrimental to the indigenous telecom industry if the sector is opened up to FDI.

We have definite information as to how security was compromised in nations that opened up the telecom sector. Big multinational companies would completely wipe out Indian companies.

We must understand that those making a case for promoting the investment regime are keen on only stashing away profits and not at all interested in the consumer's good.

Another significant aspect of the debate is to treat the vast Indian market as a national asset. If we freely throw open markets, it will hardly serve any purpose for the country. At the least, we must leverage this asset to our advantage and extract concessions from others.

But there are many instances that show that the developed nations are not responding to the principle of reciprocity. As it appears, in the WTO negotiations, developed nations are objecting to free movement of human personnel across the border.

They have also refused to open up the agriculture sector. That they are gripped by acute paranoia is evident by the manner in which the US administration bans BPO but asks India to open its markets.

(As told to Ajay Singh)