Many a slip

Liberalising FDI limits will be meaningless if the line ministries end up blocking foreigners

In the face of the opposition by various line ministries, the government has done well to try and hike the FDI limits in various sectors. Indeed, the fact that the prime minister cleared the hike in FDI levels in insurance, from the existing 26 per cent to 49 per cent, suggests the government is willing to slug it out in Parliament. It may even have had some back-channel discussions that suggested it could pull it off, in quite the same manner it managed to push through FDI in multibrand retail. The question, however, is whether foreign investors will be enthused enough to bring in the dollars India needs if the rupee is to remain at even current levels. Right now, given the likely current account deficit of around $80 billion in FY14 as well as expected FDI and other flows, India is short by around $20-25 bn, which is making the rupee depreciate. Normally, that money could come in through FIIs, but given the appreciating yields in the US, they have pulled out $2.9 bn between April 1 and July 15.

To be sure, some money will come in immediately. For instance, there are several telecom companies whose domestic partners simply don't have cash to pump in if the firms are to expand operations. Similarly, many single-brand retail firms will be happy to come in with a 49 per cent equity through the automatic route. But the problem with Tuesday's clearances is they don't touch the really important sectors where there is a ready market for investors. In the pharmaceuticals sector, to take one example, the FIPB has been deferring Mylan's proposal to spend $1.6 bn to buy Stride's injectables business since the department of industrial policy and promotion (DIPP) is against allowing foreign firms to buy Indian ones. The DIPP argument is that this will slow down domestic production, raise prices as well as imports. Given that Indian pharmaceutical exports are over Rs 80,000 crore and there are 30-40 producers for most drugs, the fear seems far-fetched.

Similarly, not long after the UPA risked its government on FDI in multibrand retail, its industry ministry has come up with rules that have prevented even one global retailer from putting in an application. One such rule says that once a foreign retailer develops an SME as a supplier 30 per cent of sourcing has to be from SMEs and that SME grows in size, that sourcing will no longer be seen to be fulfilling the norm. In the defence sector, where FDI caps have been raised, this is to be allowed on a case-by-case basis. Conditional clearances, past experience has shown, simply don't work.

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