Two vital issues — Disinvestment and foreign direct investnment (FDI) have generated a major political debate in the country particularly within the government. In view of the ongoing churning, government appears to be taking time to take stock of the situation. It is in this context the Cabinet Committee on Disinvestment (CCD), which met on September 7, put on hold a decision on the sale of government equity in oil PSUs — Hindustan Petroleum Corporation Ltd. (HPCL) and Bharat Petroleum Corporation Ltd. (BPCL) for three months.

The decision was mainly due to a strong view within the government for a review of the disinvestment policy for any course correction if needed. There were suggestions within the Cabinet that there is a need for reconsideration of the route of strategic sale of equity along with management transfer. Instead, a strong Group favoured selling equity to the general public in small lots, while at the same time retaining government control.

This would help achieve the two fold objectives of (i) distributing wealth to general public instead of handing over to private companies, including multinationals and (ii) garnering resources needed for funding the revamp, expansion and modernization programmes of the PSUs. In the middle of this debate, Prime Minister Atal Bihari Vajpayee said that a review did not mean a reversal of the Disinvestment policy.

On September 17, the government said it was considering hiking the FDI ceiling in sectors such as telecom, insurance and airlines. However, on September 18, the Cabinet deferred any decision on the issue. On September 19, credit rating agency Standard and Poor downgraded India’s rupee debt to the junk category on par with local currency debt of countries such as Costa Rica, Guatemala, Kazakhastan and El Salvador.

The Indian government and many from the corporate world feel that S&P’s downgrade is a blatant attempt to put pressure on the country to tailor its policies to suit the rating agencies worldview. They argue that the fiscal situation has remained more or less the same over the last five years. In fact, this year’s 5.3 percent fiscal deficit is lower than the 6 percent plus four years back when India’s rating was pegged at a far higher growth. The country today has the highest ever foreign exchange reserves, the lowest ever inflation and the biggest ever food grain stocks. It is interesting to see the kind of messages S&P was sending before South East Asian meltdown to countries that were involved.

Besides, the rating agencies, western diplomats have expressed concern on policies related to foreign investment, private sector and labour reforms. This they have done in their meetings with ministers as well as media. These are subjects of the interest to foreign investors.  Increasingly, diplomacy in the capital has been subject to corporate pressure seeking concessions for foreign capital.

The government’s problem of doing away with or reducing subsidies and increasing user charges are well known. Power reforms also appear to be moving towards an uncertain future following former Power Minister Mr. Suresh Prabhu’s resignation.

The fate of the disinvestment programme hangs in balance. The fate of big-ticket disinvestments of MTNL, Air India and Indian Airlines, National Fertilizers and the proposed Initial Public Offerings of GAIL and IOC is not clear. The disinvestment ministry is unlikely to achieve its target of raising Rs.12.000 crore this fiscal. It has so far done Rs.3, 190 crores.

Meanwhile, Standing Conference of Public Enterprises (SCOPE) has once again reiterated its view on disinvestment particularly, strategic sale of performing companies. Instead the government should grant full autonomy to the performing companies, the apex body of PSUs feels and believes that the performing companies should be made into board-managed companies with full autonomy. These boards should be freed from bureaucratic and political interference, which will help them perform even better in the future. SCOPE has argued. It has also called for a political consensus before disinvestment of PSUs could be carried out.

Foreign Direct Investment
The debate on FDI has recently being sparked off by the Report of the Steering Group on the subject, headed by Mr. N.K. Singh, Member, Planning Commission. The Committee recommended reducing sectoral FDI caps to the minimum and eliminating entry barriers. With the exception of ‘defence industry’ the Committee says FDI caps should be recovered in all manufacturing and mining. The Committee says caps should also be eliminated in advertising, private banks and real estate and raised in telecom, civil aviation, broadcasting and plantations.

Since 1991, FDI in India has averaged 0.5 percent of GDP, though in bounty years such as 1997-98 and 2001-02 it has jumps upto 0.9 percent. Caps on FDI are not the only reason cited by foreign investors for India attracting less than 1 percent of FDI. Foreign investors complain that it is frustrating to cope up with bureaucratic controls and procedures. The time taken for applications, bidding and approval of FDI projects tends to be too long. Multiple approvals, excessive time taken and long lead times of upto six months for licenses for duty free exports, lead to loss of investor confidence, notwithstanding the promises of a considerable market size. Of the three stages of project, namely general approval, clearance (project specific approval, such as environmental clearance for specific location and product) and implementation. The second is most affected by red tape. There has been progressive liberalization of these policies, but foreign investors cite this as an important reason for not putting their money in India. While entry has been made easy, there are considerable difficulties of exit for foreign companies.

There is also resistance to FDI from local business. The new ASSOCHAM President Mr. R.K. Somay has pleaded with the government not to raise FDI caps, as Indian industry would not be able to withstand the competition unleashed by MNCs. Ironically, ASSOCHAM was predominantly a chamber which championed the cause of MNCs. Its character has changed over the years and many leading Indian corporates are on its boards.

There has been very little investment in the last few years.  The only investment that has been of any magnitude has been public spending in areas like roads and housing.

In areas where investment has taken place, FDI has also come in such as telecom and automobiles. A foreign investor who comes to India faces what may broadly be categorized as four types of risks - political risks, commercial risks, policy risks and regulatory risks. Political risks relate to problems emanating from the nature of government.

The nature of a coalition government and differences within the Council of Ministers relate to political risks. These differences within the Cabinet have recently come out very clearly.

Commercial risks of investing have increased in recent years not only in India but in other parts of the world. Changes in policy constitute policy risks. While fine-tuning of policy is necessary, there have been cases of complete reversal of policies. Foreign investors often complain of vicissitudes in policies in India. The regulatory risks pertain to orders passed by regulatory bodies. Orders passed by Electricity Regulatory Commissions, Port Authorities, Tariff Commission and Telecom Regulatory Authority of India have led to legal disputes. Many of these orders are contradictory and lack clarity.

Political Compulsions
The Bharatiya Mazdoor Sangh is at present India’s largest labour union and its members constitute a major portion of the BJP’s urban vote base. Without the wings active help it would be difficult for most urban MPs to win elections.

Apart from the BMS, significant opposition to the three cornerstones of reforms - disinvestment, free flow of foreign capital and labour laws - comes from RSS and Sangh Pariwar outfits like Swadeshi Jagran Manch. While the RSS is not against disinvestment per se, it opposes sale of profitable PSUs. Its opposition to foreign capital is well known.

Hectic lobbying is being carried out by both the SJM and RSS to stall these aspects of reforms. Equally, strong is lobbying by powerful groups who want India to open up as early as possible. Absence of any crisis means there is little motivation for the NDA to unleash its reformists face.