In the last five decades, policy towards private foreign
capital has moved closely with exigencies of India’s external payments
position, and with changing official perceptions of the role of foreign capital
in alleviating or exacerbating that position. The early liberalisation of the
late 1950s was in part motivated by a balance of payments crisis. The
restrictive regime of the 1970s, and FERA in particular, was influenced by the
belief that excessive remittances of foreign enterprises were worsening a
precarious balance of payments position. The gradual liberalisation of the
1980s and the major reforms of the 1990s were, to different degrees, responses
to external payments difficulties.
Recent spate of FDI liberalization (Retail, Civil Aviation
etc,) is also mostly driven by the ominously placed CAD conditions.
There could be little argument on the fact that the changing
structure of India’s socio-economic milieu require tremendous amount of capital
investment.
The demand for civil and industrial amenities like power,
transportation infrastructure (e.g., roads, airports, railways, ports,
waterways etc.), sanitation, water, education and health etc. is rising with
conspicuous rise in affordability. The demand for food, especially protein rich
food, is also rising in non-linear trend since past decade or so.
However, the supply has not matched the demand in most of these
areas leading to serious productivity constraints and persistently high
inflation. This trend highlights the urgent need to invest huge amount of
capital in building basic infrastructure and improving agro productivity.
Unfortunately, all the required capital is not available within the country and
we have to rely on the foreign capital for this.
In our view, this is as simple as it sounds and we need not have
complicated the matter. If we need foreign capital, which we do desperately, we
need to be consistent in our approach towards investors.
The basic rule of capital investment is that the investor needs
(a) reasonable protection of his capital from systemic failures, (b) reasonable
return on the capital, (c) mobility of the capital and (d) consistency in laws,
including tax laws, governing the capital.
Despite the East India Company phobia at the time of
independence, Nehru gave assurance to foreign investors in 1949 that there will
be no discrimination between foreign and Indian capital and foreigners will be
given full rights to earn and remit profits. The first industrial policy in
1956 also highlighted the importance of foreign capital.
The emphasis was however changed in early 1970’s with the
implementation of Foreign Exchange Regulation Act, 1973 (FERA) which marked the
first major departure from the stated policy of welcoming foreign capital.
Ironically, the current Prime Minister Dr. Manmohan Singh was one of the key
forces behind designing and implementing FERA first as adviser to the then
finance minister L. N. Mishra and later as finance secretary.
In 1990’s FERA was repealed and replaced with much softer
Foreign Exchange Management Act (FEMA). However, there have been frequent flip
flops on the of issue foreign investment in India despite deep recognition of
the need and desirability of such capital.
Frequent controversies surrounding foreign investment through
Mauritius route and recent cases like Vodafone and Etihad highlight the lack of
conceptual clarity and consistent framework for foreign capital.
It would be wrong to suggest that the complete removal of
capital controls is desirable at this stage. However, inconsistency and
incongruence in the framework governing the foreign capital is completely
avoidable.
We need to remember investors will come when they like and not
when we want them desperately.
nice
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