John Major is probably right in forecasting a golden future in which India will assume its place in the world as an economic power. But this serene prediction depends on a large number of internal arguments being resolved correctly "" if not first time round, then eventually. One perennial argument is over foreign investment. It is not developing very well right now.
The problem is not simply that the government is deadlocked over the issue, with the finance and industry ministers in favour and the civil aviation and information and broadcasting minister "" who happens to be the same person "" adopting a strident anti-foreign stance. Given the government's make-up, it is perhaps not surprising that such divisions arise even though it is supposedly united behind a target of $10 billion of foreign direct investment annually.
Of greater concern is the absence of a consensus in the corporate world on having an open economy. First there was the cowboy paper from the Confederation of Indian Industry last year, which accused foreign companies of all manner of sins. Now there is a report on foreign investment from a committee of the Associated Chambers of Commerce and Industry of India (Assocham).
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This report begins with the grand words which might be heard at any meeting of Assocham, CII or Ficci at which foreign visitors are present. Indian industry is being transformed...multinational companies are helping in this process...foreign investment is too small...it must be made easier. The need for foreign investment cannot be over-emphasised, it says, if the economy is to achieve 7 per cent annual growth. It also has some wise words about the need to restrict external borrowings. How good it is that industry is looking out for the interests of the country as a whole!
On to foreign institutional investment, and the raising of the first red flags. FII money can be hot, the committee warns. In other words, they might actually sell the shares they have bought "" though it might be argued that any company which has listed its shares would be aware of this fundamental point and that Indian shareholders have been known to sell out too.
Moreover, FIIs are creeping in through various routes which give them unlimited access: they buy global depository receipts (GDRs),which I believe are issued voluntarily in order to attract foreign investors. It's all too much for the members of the committee. They insist that the 24 per cent cap on foreign shareholding of Indian companies through market purchases should be rigidly maintained. But they advance no arguments as to why there should be such a limit and why stock market purchases are intrinsically different from entry through any other route.
The colours of the committee become clearer in its suggestion that FIIs should be allowed more than 24 per cent, but only if shares above this limit are non-voting. In other words, we'll take your money, but we won't let you have a say in how its spent.
The committee proceeds to discuss the holdings of Indian financial institutions (FIs). The members are concerned about FI sales of shares. It seems from the report that the FIs only acquired their stakes because of the government's grossly unfair treatment of promoters over the years. What a hard time the poor promoters have had! So it is only fair "" according to the committee "" that if the FIs sell, they sell right back to the promoters, who will then not be destabilised.
According to the committee, this would be in the national interest. FIs should sell, it says, because managements are exposed to the decisions of FIs which act in concert. They should offer 3 per cent of equity each year to the existing management at market price until the latter controls 51 per cent. Only after that should FIs make a public offer of shares for sale. FIs should also support preferential allotments to managements.
But what if somebody wants to offer more for FIs' shares than the management, because it sees a company as a good investment? Would this not be good for the FIs, for the taxpayers who own the FIs, for other shareholders who would see the value of their investments rise, for the employees of the company "" in fact, for almost everybody? This question is not addressed.
Finally come the committee members' demands on foreign direct investment. A sudden jolt to domestic industrial development "" for which, read domestic industrial promoters "" must be avoided. The message to foreign companies is: go ahead and invest in infrastructure as much as you like because we need it, but we don't want to invest in it, since the returns do not come quickly enough; keep your investments in all consumer goods industries to just 40 per cent "" we'd quite like your capital, but these are the lucrative industries which we want to control; and if you already have control, divest yourself of it.
In such a deluge of self-protectionism from Indian promoters, whatever valid points they might have "" for example about the need to deepen domestic financial markets and ease access to borrowing "" are swamped.
One member of the committee, representing Hindustan Lever, has already publicly disowned the report. Its underlying message is that foreign equals bad. Foreign members of Assocham might wonder whether it is worth paying their dues. The responses last week of H L Somany, Assocham's president, might be summed up as let the MNCs complain "" we outnumber them. The larger point, though, is that Indian managers, employees and customers might also wonder whether the Assocham prescription is really, as it claims, in the national interest or simply protecting the fiefdoms of a few people.