Three key ministries have raised serious concerns about a proposal by the National Security Council (NSC) to create a “sensitive list” of sectors that will be ring-fenced from automatic approval for foreign direct investment (FDI) for security reasons.
Among their concerns ministries for — road transport & highways, external affairs, and chemicals and fertilisers — said the NSC’s proposals, made late last month, could adversely impact foreign investment flows.
These concerns have been raised despite the fact that the list of critical sectors, the specific threat perceptions and need for policy change were finalised after consultations with all the key ministries.
Subsequently, members from key ministries such as defence, industries, home and corporate affairs formed groups to suggest policy changes. NSC then prepared a draft paper incorporating all these suggestions and specific measures. The adminstrative minstries have, however, now raised concerns on this draft, saying it could slow FDI inflows.
Based on inter-ministerial discussions, the NSC has proposed putting14 sectors — such as chemicals and industrial explosives, petroleum refining, gas pipelines, transport, greenfield airport projects, drugs and pharmaceuticals -- on the “sensitive list”,
Additionally, the NSC suggested umbrella legislation for dealing with national security issues arising out of FDI so that there is legal backing for any action the government takes.
NSC had suggested that FDI proposals under this sensitive list be subject to mandatory scrutiny from the Foreign Investment Promotion Board (FIPB).
It has also suggested the creation of a new body, a committee of secretaries on financial investment (CSFI), with representation from security agencies to vet all sensitive proposals on FDI.
The NSC had prepared the proposal for discussion by the 20-member committee of secretaries set up under Cabinet Secretary K M Chandrasekhar to review FDI-related security issues following concerns raised by security agencies.
The objections raised by the four ministries (see table) come in addition to concerns raised by the Department of Industrial Policy and Promotion under the commerce ministry on both the ring-fencing sectors on the "sensitive list" and the creation of the CSFI.
In its response to the NSC proposal, the ministry of road transportation has said there is no system of security screening of highway contracts that have been given to foreign companies (some through joint ventures) and they believe such a system is unnecessary, except perhaps in Jammu & Kashmir and border areas of Uttarakhand and Himachal Pradesh.
The ministry has contended that security screening normally takes a long time and could delay contract awards and the execution of national highways.
The ministry is trying to attract as much foreign investment as possible in the road sector to fulfill minister Kamal Nath's target of adding 20 km of roads a day.
The ministry also stated that about 80 foreign companies have participated in highway contracts in India so far. Of the “countries of concern” that the NSC lists, only China and Taiwan have participated in a four highway contracts.
Meanwhile, the department of chemicals and petrochemicals under the ministry of chemicals and fertilisers has rejected the NSC's proposal to bring chemicals, including hazardous chemicals, under the FIPB's ambit. Currently, 100 per cent FDI is permitted on the automatic route in this sector.
The department has also opposed the CSFI proposal, saying this might emerge as another point of delay, so the existing FIPB mechanism should continue.
The department has noted that this sector accounts for 2.5 per cent of all FDI inflows and has steadily increased between 2002-03 and 2009-10. It has argued that sufficient regulation is in place to address the concerns raised on threat of health, environment and safety. For instance, plants making hazardous chemicals require an industrial licence. For pesticides, any investment requires registration with the Central Insecticides Board.
The external affairs ministry has pointed out that the country from which investment is to be blocked should be specified for internal reference only to avoid any serious foreign policy impact that may arise from singling out a country.
NSC has countered the argument saying it has not recommended country-wise safeguards but merely highlighted the fact that country-specific safeguards are, in fact, in place even today (for instance, Chinese companies have been under scrutiny).
The ministry has also argued that monitoring and intervention based on security concerns have to be confined to specific geographical areas or sectors primarily on the basis of substantive intelligence to avoid the risks of a blanket ban. Sensitive sectors, it added, should be defined as narrowly as possible so that there is no negative impact on FDI inflows.
The ministry added that the proposed umbrella legislation should define security in a broad manner to be WTO-compatible.
It has suggested that a new legislation would be time-consuming so it might be better to modify existing legislation and administrative decisions to block such investments that are considered security threats.
NSC, has, however pointed out that even other countries have enacted similar legislation without violating WTO provisions.
| WHO’S SAYING WHAT |
| Road transport & highways # Security screening of highway contracts is not necessary except, perhaps, in Jammu & Kashmir and border areas of Uttaranchal and Himachal Pradesh Chemicals and petrochemicals # No need to bring sector out of 100% automatic route ambit, sufficient safeguards in place # Setting up committee of secretaries on financial investment will delay FDI approval process |
| External affairs # Country from which investment is to be blocked should be specified for internal reference only, otherwise it could have serious foreign policy implications # Monitoring and intervention based on security concerns have to be confined to specific geographical areas or sectors, and sensitive sectors should be defined as narrowly as possible # Proposed umbrella legislation on FDI security should be WTO-compatible |
