Small bang reform

Expectations about what the government can or wants to do on the reform front have reached so low that any movement is a positive surprise. The more liberal foreign investment regime that has been announced for many sectors is therefore to be welcomed, though it is obvious that what has emerged is a set of half-measures. The Cabinet postponed no fewer than six times in the past year its decision on allowing more FDI. That might have suggested to some observers a build-up to some major announcements, but that was not to be. Thus, there is no announcement on FDI in organised retailing, nor any further opening up in passenger airlines or in insurance (these three plus media happen to be the sectors where there has been pressure for a more liberal policy). Perhaps the government had no choice in the matter, since the Left would almost certainly have started another round of barracking from the sidelines. If so, it confirms the general belief that not much reform should be expected in the remaining 15 months of the government's term.

What passes understanding is why there are so many different hurdle limits imposed for different sectors, with no apparent logic as to why one sector should be permitted 26 per cent while another is allowed 49 per cent (under company law, there is no significance to the difference between these two numbers, except that one figure is higher than the other). Similarly, portfolio investment by foreign institutional investors is treated separately from FDI in some sectors, but clubbed with FDI in others. In some cases, non-resident Indians fall in a category of their own, in others they are clubbed with other classes of investors. In some areas, there are individual holding limits within an overall limit, in others there is no such stipulation. And on top of everything else, some sectors have seen pyramiding of shareholding while in others the total beneficial interest is what is taken into account. All of this may be a bureaucrat's dream "" imagine the man-hours of work created in deciding on the different numbers and categories, and then finding the justification for them in terms of the sensitivity of a sector, the special nature of some industries, and so on; but to the rest of the world it looks like the confusing spaghetti bowl that Jagdish Bhagwati spoke of when referring to the proliferating trade agreements being signed by countries.

Perhaps someone in the government can explain why non-scheduled airline services should be allowed only 74 per cent FDI if helicopter services are to be allowed 100 per cent foreign ownership. What is lost if foreign insurance firms hold 49 per cent in an Indian company, and not 26 per cent? Elsewhere, Air France and KLM can merge, Alitalia can be up for grabs, and Lufthansa can own Swiss "" but in India the scheduled airlines continue to face a very restrictive regime. Stock and commodity exchanges see wholesale ownership changes in other countries, but here a 5 per cent limit has been imposed on any individual shareholding in a commodity exchange (a similar restriction in the case of banks is in place but that can be relaxed to 10 per cent, while the stock market regulator has a threshold crossing of 15 per cent before an open offer has to be made). India has been attracting a sharply increased level of FDI in the last couple of years, so perhaps it is time to simplify the rules by aligning the different numbers and having uniform categories and threshold levels.