In the last three weeks, the Congress-led United Progressive Alliance (UPA) has sought to hustle through major policy changes and reorder big-ticket projects, which will not only distort an otherwise decent legacy, but may also damage the long-term perception of foreign investors about India as an investment destination.
At the same time, the haste shown by the UPA, questioned by some of its own senior cabinet ministers, raises questions of propriety, especially given that the government has turned lame duck with the country preparing for the next general election.
Also Read Anil Padmanabhan’s earlier columns
In question are the confusing changes in the policy on foreign direct investment (FDI) as well as the inexplicable flip-flop by the Indian Railways to first fast-track bids by foreign firms to participate in a $6 billion (Rs30,420 crore now) project to build diesel and electric locomotives in the country and then, within a fortnight, reject them.
Briefly, the changes in FDI norms now effectively allow unregulated downstream foreign investment in all sectors which are not on the negative list, provided they initially enter the sector as a minority partner in a joint venture. Critics have been prompt to condemn this as nothing but backdoor FDI and prompted by the fact that ahead of the election, the UPA would not like to take the politically sensitive decision of raising FDI investment limits outright across sectors. After the changes in norms, any foreign investor can, through a multitiered investment, raise its stake in a joint venture.
In the process, the government has now turned sector-specific FDI norms into company-specific ones, since it will be the equity structure, together with control of a company’s board, that will be the key criteria to distinguish between a foreign and a domestic firm. It will no doubt vest the bureaucracy with greater discretionary powers, as the circumstances will vary depending upon how investment is structured.
Ironically, the official reason for the policy change is to put in place a more transparent and user-friendly investment regime. Privately, a senior bureaucrat familiar with the discussions, but who did not want to be identified, evinced surprise at the abrupt turn in policy. “We asked them to plug a loophole in the norms (wherein foreign firms were able to duck the sectoral investment cap norms through multi-tiered investments). They have gone exactly the other way.”
It is not even certain whether foreign investors will be pleased to seek an indirect route to raise their stakes in ventures in India.
Equally worrying is the UPA government’s decision in the context of setting up a foreign joint venture in the country to manufacture railway engines.
Two years ago, when the project was initiated, it was decided that since the railways did not have sufficient funds of its own, the project should be developed as a joint venture. It was to be located in Bihar, the home state of railway minister Lalu Prasad.
In December, the railways settled for a model in which it would hold 26% equity in the joint venture. The initial document inviting bidders to participate had to be revised and was eventually readied on 25 January; after the cabinet committee on economic affairs (CCEA) signed off on it on 5 February, it was offered to bidders. When the bids were opened on 16 February, US-based conglomerate General Electric Co. (GE) emerged as the sole bidder for the contract to manufacture diesel locomotives. In the case of the contract for electric locomotives, the only bid, according to an official familiar with the developments, was “conditional”. Three of the five companies in the running for the contracts did not bid for a host of reasons, including the fact that a fortnight was not enough to prepare their bids.
Interestingly, according to the same official, GE’s bid was below the reserve price of Rs12.90 crore for each locomotive, and hence very competitive.
“GE submitted a very competitive bid to provide the most technologically advanced locomotives catapulting Indian Railways’ locomotive technology 25 years ahead,” a GE spokesperson said in an emailed statement to Mint. “While we have learnt from press reports that Indian Railways is considering setting up government-owned production units, we are awaiting an official communication on the subject.”
The plot turned awry rapidly. Within five days, a fresh CCEA note was circulated for permission to abort the joint venture route and instead house it within the railways.
Forty-eight hours later, Prasad had the cabinet’s nod, and was ready to make a very electoral-friendly announcement in his home state that another railway project with potential for local development was on the anvil.
While Prasad may or may not pick up electoral brownie points, it does raise several uncomfortable questions on government policy.
Was such haste necessary for a project of such size, worth nearly Rs30,000 crore? And if it had been found that the railways did not have the funds to do this in-house, how did it transpire two years later, when the economy had taken a turn for the worse, that the national rail carrier discovered the wherewithal to finance the project on its own? How can the cabinet justify both decisions?
What about the foreign investor? If the government was going to abort the joint venture route, then in all fairness to the competing firms, the bids should never have been opened. In the case of GE, its price bid now stands exposed and it does not have the contract despite being the sole bidder.
Undoubtedly, the flip-flop by the railways, together with the clumsy efforts to loosen FDI norms, has sullied the UPA’s track record. Of more concern is the damage it may have inflicted on foreign investors’ perceptions.
Anil Padmanabhan is a deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at firstname.lastname@example.org