Foreign Doubtful Investment

The government has reportedly done a review of Press Note 1 (which puts restraints on a foreign joint venture partner who wants to go ahead on his own in India), and decided that no change in the existing rules is required. That may well be the case, but it is ironical that instead of focusing more on the need for liberalising the domestic economy, much of the debate on economic reforms has centred on relaxing the rules governing foreign investment. Ironical, because foreign investment has always constituted only a small portion of total investment in the country (never more than 5 per cent of GDP, out of a total investment rate that is about 35 per cent of GDP). Indeed, what even foreign investors would look for most of all is a change of domestic economic laws so as to make domestic markets more competitive, transparent and rule-based. Instead, the debate has concentrated largely on limiting or raising the level of foreign equity participation in different sectors by imposing investment limits.

Nor has the debate focused on the weak framework that prevails when it comes to foreign investment rules. With the notable exceptions of banking and insurance, the foreign investment norms in almost every other sector are administered through government notifications and through Press Notes. As is evident, a government notification stipulating a certain foreign investment limit for (say) the telecom sector can be changed by another government notification, which can be done overnight and with little or no debate. All that is required is a decision by the Cabinet. However, changing the investment limits for the banking and insurance industries is not as easy, since these require amendments to specific laws, and this can be a long-drawn and difficult process in the era of coalition governments. Instead of continuing with this ad hoc approach, it would be best to have an over-arching law governing all foreign investment.

The government's response to criticism on this score is that it is a signatory to the Multilateral Investment Guarantee Association, so foreign investors should not be apprehensive""but that is addressing an altogether different issue. The fact is that there have been dozens of "Press Notes" since 1991 on all manner of policy issues. Not being laws duly debated in Parliament and recorded in the statute books, these "Notes" allow the government to take ad hoc decisions. While these Press Notes have the virtue of speed over the cumbersome process of law-making, they do add to uncertainty. Also, unlike a law that justifies what follows through a preamble, Press Notes do not possess such transparency. The Cabinet resolution of 1955 on foreign investment in the print media was not even an accessible document since Cabinet proceedings are supposed to be secret; ironically, this was overturned after half a century without any real debate in Parliament (though there was substantial debate outside that forum). Indeed, an umbrella enactment should be used to make the entire set of foreign investment rules as liberal as possible; at a time when outbound investment by Indian companies is in the same ball-park range as inbound investment, there is little reason for the defensiveness of the past.