A K Bhattacharya: How serious is the Left on FDI?

NEW DELHI DIARY

In the early 1990s, when economic liberalisation was just ushered in by the PV Narasimha Rao government, several officials working in different departments of the government would often express serious doubts about the future of reforms.

Their concern was genuine and justified as those were the early days of reforms and no one was sure if the liberalisation process, introduced in the wake of an unprecedented economic crisis, would not be rolled back once the economy got better.

Almost 14 years later, nobody in the government entertains any doubts about the future of reforms. The officials may debate over their pace. But there is no disagreement on the direction.

The perception had not changed even when we had a United Front government, in which a Left party, the Communist Party of India, was a coalition partner. Reforms continued even then.

And reforms are continuing even now although the United Progressive Alliance (UPA) government of Manmohan Singh is critically dependent on the Left parties for its survival.

But there is growing concern over one specific area of reform ""the future of foreign direct investment (FDI) in India. Should the government do away with all the remaining restrictions on FDI in different sectors of the economy?

There are no clear answers, either, from the UPA government or from its allies. The problem arises also because of the manner in which successive governments have dealt with the FDI issue.

In the early 1990s, the finance ministry had mooted the idea of liberalising FDI inflows through specific changes in legislation. That idea was not pursued.

Instead, the government continued to liberalise FDI norms by issuing executive orders. Thus, the Cabinet would meet periodically and approve specific proposals from the industry ministry on raising the FDI limit in different sectors.

There are only a few exceptions like the insurance sector, where the FDI norms have been liberalised through legislative changes.

It is true that legislative changes entail a long time-consuming process and also the uncertainty that a coalition government without a clear majority might not be able to get the bill passed in Parliament.

In fact, the UF government in 1997 failed to get Parliament's approval to a bill that sought to allow FDI in the insurance sector and that had meant a big blow to insurance sector reforms.

It was only the BJP-led National Democratic Alliance government that had the requisite majority in the Lok Sabha to get the insurance bill passed to permit FDI in this sector.

But a legislative process also ensures that changes once made cannot be easily rolled back or challenged. The UPA government has raised the FDI limit in the civil aviation and telecom sectors in the last nine months.

Both the decisions have been controversial, with the Left parties opposing. The Left may not actually do anything to force a roll-back. But these noises do send out a wrong message to foreign companies that have already invested in India in those sectors and also to prospective foreign investors.

There is no doubt that the UPA government could bring about the changes in FDI norms for the civil aviation and telecom sectors mainly because the decisions could be taken through executive orders.

Its promise to raise the FDI limit in the insurance sector is yet to be fulfilled simply because legislative changes take time and test the government's strength in Parliament as also its ability to manage particularly those of its allies who may be opposed to such decisions.

Which is why the Left has become such a powerful factor as far as the UPA government's policy on FDI is concerned.

While the Left-ruled West Bengal government has decided to pursue a policy of inviting FDI to promote growth and jobs in the state, the Left parties have decided that they must oppose the Centre's policies on attracting more foreign capital.

The Left stance on FDI is a little enigmatic. But it is bound to adversely affect prospects of much-needed foreign investment in various sectors of the economy.

What should the UPA government do? It must strive towards creating a stable environment for FDI in India. And for this, it might be a good idea to consider introducing a comprehensive piece of legislation that would eventually confer Parliament's sanction on the various FDI liberalisation decisions of all the past governments in different sectors.

A legislative cover will provide great comfort to the wary foreign investor.

Moreover, the move to introduce a comprehensive law on FDI norms for different sectors might test the Left's resolve on this contentious issue.

Instead of allowing the Left to issue protest statements against various FDI liberalisation decisions, the UPA government should challenge the Left parties to vote against the proposed legislation.

Give its political ambitions and the high stakes in West Bengal, the Left is not likely to oppose such a piece of legislation. And that might put an end to all these debates and controversies over FDI in India.

akb@business-standard.com