Tread carefully

On the face of it, the proposal being discussed by the Prime Minister's trade and economic relations committee, to come up with a comprehensive outward investment policy, has its attractions. Such a policy, for instance, will allow Indian firms to access government-procured low-cost funds to finance overseas purchases. Since the Chinese are believed to favour this route to help local companies become global giants""an example often talked of is Lenovo's catapulting on to the world stage by paying $1.25 bn for IBM's PC business""surely India can use the same route""more so, given the huge foreign exchange reserves the country has piled up. Another option being talked of is some sort of government cover to guard against the political and non-commercial risks of investing in various countries. Essentially, what is being discussed is a variant of the US Overseas Private Investment Corporation (OPIC), which, since 1971, has supported more than $164 billion worth of investments abroad. While that amount sounds large, it must be put it in perspective: outbound FDI from the US was $141 billion in 2003 alone, and rose to $252 billion in 2004, so too much should not be read into the importance of OPIC funding as far as US FDI is concerned.

The point that needs to be kept in mind while advocating any such policy is that, just like outbound FDI from the US, that from India is increasing on its own, as Indian companies find there is value to be got from such acquisitions and they have the financial muscle to fund such projects""indeed, firms that are acquiring foreign firms are usually doing so with cheap money raised abroad. Since this is the case, what is the need for the government to decide that it needs to help such firms raise low-cost finance? To help mid-sized Indian firms that cannot raise funds on their own? If that be the case, what is being suggested is that a government that does not have the managerial and financial acumen to run its own state-owned enterprises will now take on the role of assessing the worth of overseas firms as well as the capability of local Indian firms to run these units, and then take on the business risk of funding such a takeover""after all, if the government is to provide low-cost funds, it has to guarantee the risk as well. If the idea is just to provide political risk cover, this is surely duplicating the work of agencies such as the World Bank's multilateral investment guarantee agency, which provides such cover for a commercial fee. There is then the whole issue of the patronage that is to be dispensed and the allegations that will flow from this. Access to loans made available at below-market cost to firms will surely open the government to charges of favouritism.

To point out these dangers is not to argue that the government has no role in facilitating Indian investments abroad. In the case of long-term oil exploration contracts, for instance, political goodwill is a big factor. To that extent, it is obvious that the government needs to be alive to the needs of Indian industry and work on such proposals in the manner that, say, the entire US establishment was to opening up the Indian insurance sector to foreign players. But even here, lobbying for specific firms, like Tony Blair did for LN Mittal in Romania, is certain to cause a stink and is avoidable. Indeed, more often than not, it is better for an Indian company to act on its own, without being seen as part of a state manoeuvre.