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A never-ending FDI story

A never-ending FDI story
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First Published: Tue, Apr 28 2009. 10 42 PM IST

Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint
Updated: Tue, Apr 28 2009. 10 42 PM IST
Union commerce minister Kamal Nath must be scratching his head. The very point of crafting economic policy via stealth that executive fiat offers is to avoid debate, discussion and all the unnecessary obstacles of democracy. But that’s precisely what he’s getting with the latest opposition—that too from government bodies—to changes in India’s foreign direct investment (FDI) norms.
In February, the commerce ministry issued three “press notes”, or clarifications on FDI policy, seeking to indirectly increase investment by skirting around sectoral caps. The press notes created confusion instead of serving as a road map for boosting investment. Subject to wide-ranging interpretations, they increased the government’s regulatory powers and arguably opened up restricted sectors to FDI.
Illustration: Jayachandran/Mint
The Union finance ministry and the Reserve Bank of India (RBI) now believe the commerce ministry may have bitten off more than it could chew. And though it had rebuffed previous requests to review these press notes, the commerce ministry relented this week to reconsider the revised norms for banks.
The finance ministry has complained that, in one sweep, sectoral caps may have become meaningless. In a sector with, say, a 49% cap, a 49% foreign-owned company can make any amount of downstream investment without that counting towards FDI limit. The problem isn’t just that caps have been breached; the finance ministry isn’t sure if a breach of this magnitude was even intended.
RBI has expressed similar reservations since such calculation issues can render some banks as foreign-owned before the law, triggering a different set of regulations. ICICI Bank, for instance, has more than 50% foreign investment, but is controlled and managed by Indians. The new norms leave it a foreign entity; the bank has recently written to the government resisting this classification.
The commerce ministry’s decision this week may alleviate the woes of banks such as the ICICI Bank. But there are dozens of companies in other sectors still in the dark.
If the government had gone through the usual legislative route, clarity would have won the day. But it never meant to take that chance during an election year. Now, intra-departmental feuds are leaving the foreign investor even more confused. This controversy only reinforces the belief that most of India’s liberalization is done by stealth.
Was the commerce ministry justified in making FDI changes? Tell us at views@livemint.com
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First Published: Tue, Apr 28 2009. 10 42 PM IST
More Topics: Ourviews | Kamal Nath | FDI | ICICI Bank | Views |