INVESTMENT FOR DEVELOPMENT PROJECT
SECOND NATIONAL REFERENCE GROUP (INDIA) MEETING
Chennai, June 9 2002
A Brief Report of the Proceedings
1. Introduction
1.1 The ‘Investment for Development’ (IFD) project aims to create awareness and
build capacity of investment regimes and international investment issues in
developing and transition economies. This two-year project, launched in September
2001, is being conducted by the Consumer Unity and Trust Society (CUTS), in
collaboration with the United Nations Conference on Trade and Development
(UNCTAD) and is supported by the Department for International Development
(DFID), UK. The project involves fact-finding and advocacy work on investment
regimes in seven developing and transition economies, namely, Bangladesh, Brazil,
Hungary, India, South Africa, Tanzania and Zambia.
1.2 The main objective is to assist project countries in designing and implementing
effective investment policies that will contribute to equitable growth and
development. The project will also delineate measures that will help developing
countries in general, and selected countries in particular, to shape an environment that
stimulates foreign direct investment as well as domestic investment. The project also
aims to identify key frameworks and policies that will help to maximise the benefits
of investment on the economy. Finally, the project will contribute to the assessment
of needs and formulation of negotiation strategies for developing countries for
discussions on investment issues at the regional and multilateral levels.
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1.3 One of the most important activities of the IFD project is to form a National
Reference Group (NRG) in each of the partner countries. The purpose of creating an
NRG is
to monitor the quality and content of research outputs generated,
to create a sounding board which could be used for advocacy on foreign investment
regimes in these countries and
to discuss International Investment Agreements and international investment issues
and deliberate on strategies which could be used by developing countries on
investment issues at international forums.
1.4 The second Indian NRG meeting was held in Chennai on 9th June 2002. The
participants in the meeting discussed the Investment Performance and Perceptions
Report pertaining to India. The report was prepared by Sanjib Pohit of National
Council of Applied Economic Research (NCAER), New Delhi. The meeting was cohosted by CUTS and NCAER, which is the project partner in India.
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2.
Inaugural Session
Speakers: Sanjeev Ahluwalia, Secretary (Finance), Government of Uttar Pradesh; Mr
Bharat Jhunjhunwala, Journalist; S Sundar, Distinguished Fellow, Tata Energy Research
Institute and Pradeep S Mehta, Secretary General, Consumer Unity & Trust Society
2.1 The meeting started with a welcome address by Pradeep S Mehta, Secretary General
of CUTS. He gave a brief background of the meeting. Regarding the range and levels of
activities, he emphasised that CUTS is as well known by Mike Moore, the Director
General of the WTO as much as by a Sarpanch (village head) in a district in Rajasthan.
CUTS facilitates the researchers to hear the voices of the poor. An appropriate interaction
is required as Indians are emotive about some of the issues and hence the objectivity gets
blurred.
2.2 It was noted that the meeting was an interesting gathering of the stakeholders.
Investment is a big concern, especially in the infrastructure. Even people of California
affected by power crisis have similar concerns. One of the differences between the pre
and post reform period in India is that efficiency of investment has come into focus.
Pattern of external resource flow has also changed. Government aids from developed
countries have fallen down while the private capital flow has increased.
2.3 It was also noted that the tax rates in India had been very high and the collection
system poorly organised. Even if people wanted to pay, paying was difficult. That is the
crux of the reform movement in India. Nothing has happened as projected in the report on
infrastructure prepared by Rakesh Mohan.
2.4 Restructuring will increase the arena of discussion providing more space for the
consumers. Power supply to the poor people, supply of drinking water, supply of roads
etc. have public- good characteristics. It is difficult to charge individuals for such
services. Earlier it was thought that they can only be taxed which could be done by the
government and it should therefore provide these services. But things have now changed.
Private Sector can also provide many of such services in a competitive environment.
However, competition is a double-edged sword. It promotes efficiency but it can be
devastating if not regulated properly.
2.5 The recommendations of the first NRG meeting were discussed and concern was
expressed over the people who do not have the power to enter the market. Promotion of
power loom may destroy handloom and cause unemployment. There is a conflict
sometimes. Organised sector employment is stagnant. We have to look not only at the
consumer per se but different types of consumers.
2.6 There is a general consensus that macroeconomic stability is important. But there has
been a continuous decline in government savings and investment. We have achieved
stability but at the cost of lower public investment on infrastructure.
2.7 It was said that there should be free movement of people. If capital is allowed to
move freely, people should also be able to move freely.
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2.8 It was also observed that the connection between competition regulation and
investment is not obvious. There cannot be investment unless there is level playing field
created by the regulators. Independent regulation was not part of the reform process, but
soon the government realised that unless it is available, private investment would not
come through. The experience shows that where the private sector has been given a fair
chance, investment has come through. But regulation is not a substitute for competition.
Session: Investment & Competition at the WTO- India’s
Approach
Chair: Subir Gokarn, Chief Economist, Credit Rating Information Services of India
Limited (CRISIL)
Speakers: Augustine Peter, Director, Ministry of Commerce, Government. of India and T.
C. A. Anant, Professor, Delhi School of Economics
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3.1 It was discussed as to why India has reservations on Multilateral Competition
Agreement (MCA). It was said that it is by consultation and consensus that the
government decides its views. Based on the inputs available, it may not be the
appropriate time for MCA. India is actively participating in the discussions of the
working groups on both, competition and investment.
3.2 The linkage between trade and investment is a difficult issue. People have been
arguing that we already have an investment agreement in GATS. But commitment in
GATS is not for commercial presence but liberalisation in particular services. Investment
is different, as it is a long-term commitment as against trade, which is one-time. There
has been proliferation of BITs. India is signatory to 45 such treaties. They are working
quite fine and there is no need for a multilateral agreement.
3.3 In BITs, commitment is post-establishment, but the multilateral framework may
include pre-establishment commitment putting more obligations and less freedom in
policy making. Moreover, there is no guarantee that an agreement on investment will
increase flows. Any multilateral agreement restricts the freedom of developing countries.
A study by WTO-UNCTAD has found that some of the industrialised countries have
used performance requirements for 100 years.
3.4 Regarding competition law, India qualifies for everything that they are talking about.
But every agreement has some element of competition policy. It is not clear how they
will be addressed or how the existing agreements will be modified.
3.5 There is an important role for competition policy in the development context. It
promotes growth of markets. There is considerable amount of confusion regarding what
is competition. Competition relates to business and practices. It affects access to goods
and services.
3.6 Business practices are to some extent culturally determined. Competition policy has
to consider this angle and determine how exactly the government should intervene in the
market place.
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3.7 What should be the interface between competition and regulation is another important
issue. Regulators need not always proceed in a competitive manner. The manner the
regulators behave, may not favour competition.
3.8 There are wide differences across countries. Even at domestic level there is
disagreement. But it is also true that there are significant cross-border concerns and
individual countries are not able to handle all these. Given this scenario, do we need a
competition policy at the international level?
3.9 The possible options in this regard were discussed.
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Soft Law – as we find in international financial sector comprising of codes and
guidelines. These are present in accounting, banking and securities markets
regulation.
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Hard law – a TRIPS-type approach where we decide to have some minimum
standards that the countries would be required to maintain.
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Intermediate solutions – GATS-type approach, where countries would be given the
options in terms adopting different types of provisions as well as making sectors
subject to competition law progressively.
3.11 The government has to clearly define its objectives and priorities while talking about
competition or investment at the WTO. It should also be prepared to make trade-offs to
maximise its gain from the overall negotiation process rather than sticking to any
particular point on any issue.
3.12 There is a hook in the TRIMS agreement that brought the issues of competition and
investment at the WTO. Competition and investment is a part of built-in agenda. At the
time of Marrakesh Agreement the Indian Commerce Minister wanted competition
provisions to supplement TRIMs.
3.13 India is also investing abroad and hence agreements on competition and investment
may also favour India in the long run.
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Session: Regulatory Reforms and FDI
Chair: TCA Srinivas Raghavan, Senior Fellow, Asian Institute of Transport Development
Speakers: S K Sarkar and T H Chowdary, Former Chairman and Managing Director,
Videsh Sanchar Nigam Ltd.
4.1 In India the FDI inflow in 2001-02 was $3.904bn against $2.339bn during 2000-01.
The major sectors that attracted FDI inflows in India in 2001-02 are: telecom, power, oil
and refinery, electricity equipment, transportation and services sector.
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4.2 Apathy towards export oriented manufacturing industries, anti export bias of trade
policies encouraging production in domestic market rather than exports, small scale
industry (SSI) reservations, rigidity in labour laws, weak bankruptcy laws, weak
infrastructure, cumbersome procedures, FDI's reluctance in infrastructure sectors,
absence of strategic sales of public utilities to foreign companies, etc, contributed to
lower than expected FDI inflow into India.
4.3 FDI inflow also gets discouraged due to the existing cap on foreign equity holding
(insurance: 26%; telecom: 49%; domestic airlines: 40%; banks: 49%). High transaction
costs is the other reason for low FDI flow. Of course the global slow down has also been
a contributing factor.
4.4 Foreign/Indian investors’ perception in doing business in India is also quite negative
leading to general apathy in investment in industry. Bureaucratic delays, inconsistent and
unpredictable standards, cumbersome documentation, lack of sectoral policies in some
infrastructure sectors contribute to lower inflow of FDI.
4.5 Role of regulatory reforms in enhancing FDI is limited, but very important. It must be
kept in mind that the regulatory reforms mean ‘changes that improve regulatory quality enhance performance, cost effectiveness - legal quality regulation - revision of single
regulation, scrapping/ building of new regulatory regime, improvement of processes for
making regulation’, and therefore, there is a need to examine every aspect of regulation
keeping in mind this definition.
It was noted that telecom is the only sector that is witnessing true liberalisation and
though halting and still with distortions, bestowing consumer benefits and attracting
massive domestic & foreign investment. It is also the only sector that is spurring
domestic indigenous products & world-class enterprises, enabling introduction of
electronic governance, commerce, education and promoting impressive growth of software and I.T -enabled services exports. It has also witnessed corporatisation (eg. Bharat
Sanchar) and disinvestment (Hindustan Telephones Limited , Videsh Sanchar Nigam
Limited, Mahanagar Telephone Nigam Limited) necessitating frequent changes in policy
and law.
4.6
4.7 What consumers are yet to receive are Quality of Service (QOS) measurements,
publication and verification, Citizen (Telephone) Charter, and accountability. Full
benefit of Internet Protocol/Voice Over Internet Protocol (IP/VOIP) telephony is now
restricted to internet users only. Penalties, compensation, damage for service deficiency,
directory assistance - combined directory of all subscribers belonging to different
operators and “reachability” of company officials are still not available to the consumers.
4.8 They also do not get effective and intelligent participation in Telecom Regulatory
Authority of India’s (TRAI) “consultations”. Every State Capital must have one
Consumer Division of TRAI. TRAI, Telecom Dispute Settlement Appellate Tribunal
(TDSAT) are also full of retired aged people and unsuitable mindset. Talent is a casualty.
There is regulatory capture and regulatory forbearance.
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4.9 The proposed Convergence Bill with the parliament proposes Communications
Commission of India (CCI). Telecom and broadcasting are being combined because of
common carriage. Ignoring that content and intent are different.
4.10 The following further actions were suggested: Telecom Commission should be
abolished and Bharat Sanchar should be broken up into State-wide Telcos; and an
International Long Distance (ILD) company; all as subsidiaries of a holding company. To
keep Internet prices low, telcos should share Dial-up Access Revenues with Internet
Service Providers (ISPs). Local loop should be “unbundled” for competitive supply of
broadband access.
4.11 There were other opinions such as FDI comes because of bad governance.
Washington consensus argued that the countries could not repay debt because of bad
governance and hence FDI would be the ideal route to inject capital into these economies.
4.12 What is implemented is not policy but rules and laws. Hence translating policies into
appropriate legislation is important. FDI is demand driven and we are a demand
constrained economy. Effective measures need to be taken to raise demand in the
economy.
4.15 Capacity building of the consumers can be in many fronts. Especially consumer
organizations should be made aware of the issues. Many of the technical and behavioural
issues are not very clear to them. Technical revolutions are giving so many benefits.
Indian consumers are not getting them. Government is not allowing all these to make
money for itself.
5.
Session: FDI in India
Chair: Sanjeev Ahluwalia
Speakers: K.J. Joseph, Fellow, Centre for Development Studies, Trivandrum; Manoj
Pant, Professor, School of International Studies, Jawaharlal Nehru University;
Biswatosh Saha, Professor, IIT, Kharagpur; Sanjib Pohit, Senior Economist, National
Council of Applied Economic Research, New Delhi
5.1 The gap between approved and actual flows of FDI in India and the rate of FDI
fructification in India has been at a low level. It also appears that since mid-1990’s there
has been a decline in the FDI approvals and actual inflows. It has been noted that the gap
between the FDI approvals and actual inflow is nothing specific to India. In China also
there has been a difference between the FDI approvals and actual inflows. But
fructification rate as well as the rate of decline in the FDI approvals is found to be much
lower in the case of China. While the overall fructification rate for FDI in India was as
low as 27 per cent, that for the FDIs involving NRIs is found to be much higher.
5.2 Analysis of the determinants of FDI fructification showed that there is a relationship
between rate of fructification and the size of the firm. That is, while the probability of
contract failure declines with size, beyond a certain level, size of the local firm might
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reduce the probability of FDI fructification. This suggests the prevalence of FDI with a
view to takeover the local firm and the approved FDI did not fructify because the large
local firms resist the takeover move. Given the fact that FDI inflows in the form of
Mergers and Acquisitions (M&A) likely to have adverse impact on the overall growth
and development and such inflows undermines the fructification rate, there appears to be
the need for appropriate change in our policy framework to discourage FDI investments
involving M&As.
5.3 It was also noted that the probability of FDI fructification increases if the cases
involve non-resident Indian (NRI) participation. This underlines the need for tapping the
NRIs for promoting FDI inflow. In this regard India needs to draw lessons from the
Chinese experiment wherein there have been a series of policy initiatives specifically
meant to attract the overseas Chinese. Another important finding related to the role of
experience of the local firm in influencing FDI fructification. The result tends to suggest
that the probability of FDI fructification increases with prior experience of the local firms
in dealing with the foreign firms.
5.4 There was a debate on short term and long term gains of FDI. It was opined, FDI by
definition is long term. Control relates to degree of ownerships. But they are not the
same. Moreover, we cannot ignore FDI, if we want to be part of world commerce. Till
1992, FDI was predominantly greenfield investment, but now there is predominance of
M&As.
5.6 We need to understand why an entity wants to invest in a foreign land. The most
important factor is that the investor has some technology, which he wants to use and
make profit out of it in a foreign market. This can be done in three forms: exports,
licensing of the technology to a foreign party or FDI.
5.7 Buyer of technology is never certain about the type of technology s/he is going to
buy. There is market failure because of that. Thus FDI gets importance.
5.8 It was also pointed out that making the so-called distinction between ‘silicon chips’
and ‘potato chips’ while talking about FDI is rather naïve. It is important to know, for
what we are trying to get FDI.
5.9 The researcher for India report A, Biswatosh Saha made his presentation on FDI
policies in India.
5.10 Researcher for India report B, Sanjib Pohit presented findings of his report. The
report had been sent to the NRG members in advance. He spoke on perceptions of FDI in
India. The presentation was based on a survey conducted by NCAER under the IFD
Project. The sample was quite small and three major groups: Civil society, local firms
and foreign firm subsidiaries, were interviewed.
5.11 In IT and telecom good things have happened and all the three groups agreed on that
but not much happened in other sectors.
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5.12 People in the civil society perceive that FDI brings technology, management
techniques, improves competitiveness and also brings access to the world markets.
Overall, people feel that FDI is desirable. From the local firms’ perspective, IT sector has
responded to arrival of FDI in a more positive way than the other sectors.
5.13 Civil society suggestions included support for local business to upgrade technology
as they also want better competition, regulation and reforms in labour legislations. There
are conflicts, as on the one hand they want more freedom for themselves on the other
hand they want to impose restrictions.
5.14 In the floor discussion it was noted that FDI should be for development purposes.
Pohit talked about perceptions and bad governance. In this context it was observed that
International Monetary Fund (IMF) says checking money laundering is essential to
ensure good governance. But till date we do not have any law on money laundering.
5.15 The benefits of FDI do not reach all the people of a country. Nothing is coming for
agriculture or rural industries. FDI is coming only in big cities. The India Report B
suggests, there is good impact on IT and telecom and they are used by rich people but not
in power that is used by everybody.
5.16 However, it was pointed out that there is very little FDI in agriculture, because we
never wanted it in agriculture. It needs changing of rules. Moreover, savings rate cannot
increase beyond a point, especially in country where there is so much of poverty.
5.17 The potato chips factories set up by the foreign companies are typically capital
intensive. They are neither generating employment nor are exporting. Studies have shown
that export intensity of domestic firms is higher than foreign firms in India.
5.18 FDI in pre and post 1991 are not strictly comparable. If we look at savings rate it has
been stagnant. In other East Asian countries savings rate jumped. Investible resources are
scarce. FDI has not made much impact.
6.
Session: FDI and the Infrastructure Sector
Chair: Y M Shivamurthy, Executive Vice President, IDFC
Speakers: Subir Gokarn and Aradhna Agarwal, ICRIER
6.1 The session started with an introduction to the concept of infrastructure, which is the
basic underlying framework of facilities through which goods and services are provided
to the public. This was categorized into:
6.2 Physical infrastructure: power generation, transmission and distribution;
telecommunications; port handling facilities; transportation (roadways, railways, airways
and water transportation); water supply and sewage disposal; irrigation; urban mass
transport systems and other urban infrastructure.
6.3 Social infrastructure: human resources, including organizational skills, technical
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expertise, educational levels, health and social services.
6.4 The role of cost-effective infrastructure is essential for the efficient operation of
existing productive assets and enterprises and for attracting new investments, domestic
and foreign. It also affects production and consumption directly and creates spillover
effects on every sector of the economy.
6.5 Social infrastructure is important in enhancing the quality of human capital through
the provision of facilities for housing, education and training, medical facilities, courts,
police stations and recreational facilities. Improved infrastructure produces benefits by
increasing cost effectiveness and productivity.
6.6 India has been facing severe resource constraints in financing infrastructure due to
several reasons. Lack of government financial resources (due to financial crises, budget
deficits, international adjustment and austerity programmes) and decline in concessional
aid (both bilateral and multilateral) for infrastructure projects are the most important
ones.
6.7 This has made India look towards FDI as a means of financing its infrastructure.
However, the absolute amount of FDI inflows in India has been very small. Amongst
infrastructure sectors, only telecom has made the desired progress in the country after
liberalisation. Foreign investors do not appear to be interested in other sectors.
6.8 A good legal framework is a prime condition for attracting foreign direct investors
because these investments are huge and involve long gestation periods. Another
important requirement is good governance as such investments tend to have a long
gestation and pay-back periods and hence are perhaps more susceptible to political and
ideological vagaries. It is also necessary to ensure long term continuity of policies and to
establish a regulatory mechanism for healthy development and monitoring of projects.
6.9 The need for new forms of partnerships like contracting out or management contracts,
private financing of public facilities, leasing, joint ventures, build-operate-transfer (BOT)
schemes and privatisation or capitalisation were emphasised.
6.10 The multilateral agencies can also play a crucial role here. The role of UNIDO is to
create an enabling environment for the fruition of such a business, through policy advice,
guidelines and capability building. This assistance includes the establishment of the basic
legal framework for Private Financing of Infrastructure (PFI) projects, the preparation of
a standard concession agreement, establishment of procurement rules and procedures, the
bidding documents and bid evaluation.
6.11 Multinational Investment Guarantee Agency (MIGA) promotes FDI to developing
countries by providing guarantees to private investors against political risks. It is
projected that some 20 percent of MIGA's total guarantee portfolio will be in Asia. Of
MIGA's current guarantee portfolio in Asia, two thirds has gone to infrastructure projects.
Asian Development Bank's (ADB) guarantees private sector projects, which cover risks
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that the private sector cannot easily absorb or manage on its own.
6.12 We need to justify as to why should we discuss infrastructure as a separate category.
Investing in infrastructure means long term commitment. One cannot wind up business so
easily.
6.13 There has been a deceleration in investment in infrastructure by the government.
Conditions for attracting private investment in infrastructure need to be created.
6.14 The need to distinguish between private and foreign investment in infrastructure was
debated. Foreign investment policy has nothing special about investment in
infrastructure. We have not been able to promote domestic private investment in the
sector. Conditions that facilitate private investment would attract investment regardless of
origin.
6.15 Creating conditions for private investment in infrastructure requires viability of
business propositions. Collectivity of potential revenues is crucial here. There has to be a
fair and transparent regulatory regime. The subsidy mechanisms also need to be
transparent.
6.16 Foreign providers may bring in technology along with funds. More importantly they
will also bring in experience of building and maintaining infrastructure facilities. Thus
given relative lack of domestic capital and lack of experience, infrastructure has to be
opened up to foreign investment.
7.
Session: Civil Society Concerns of FDI
Chair: Gajendra Haldea, Chief Consultant, NCAER, New Delhi
Speakers: Gautam Mody, Centre for Workers Management and Bharat Jhunjhunwala,
Journalist.
7.1 The sectoral flow of FDI in India started with Manufacturing and then turned to
infrastructure and agriculture. It was opined that FDI is leading to outflow of funds from
the country. FDI has mainly gone into buying out of companies, in equity and in buying
of shares.
7.2 It was emphasised that transfer pricing is of vital importance. Take the example of
Maruti Udyog Ltd: the export component from the unit is declining day by day.
7.3 Bad governance is the crux of the issue and unless it is tackled effectively, the
situation could not improve.
7.4 It was felt that though domestic savings in India are increasing but the capital
formation is declining over the recent years. FDI is not complementing domestic savings
and is not beneficial in the long run due to repatriation of profits and flight of capital. FDI
could, however, show an increase in the growth rate in the short run.
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7.5 The example of China was cited to show that its implied growth rate of 7.6 percent
with domestic savings rate of 40 percent was not much better than India’s growth rate of
6.7 percent with domestic savings rate of only 21 percent. It was also said that there exist
an unholy nexus between the Government of India and foreign investors.
7.6 It was pointed out subsequently that a regression analysis involves a study in much
greater detail for it to be meaningful.
8.
Closing Ceremony
Chair: Pradeep S Mehta
Speakers: P.V. Indiresan, Former Director, IIT, Madras and S Sundar, Distinguished
Fellow, Tata Energy Research Institute, New Delhi.
6.1 The culture of putting the blame on government for everything was questioned.
Basically the argument is that free trade and competition increase growth but not
employment. Even the growth has become shaky. Social security need is required.
Further investment on agriculture and crafts are required. The concept of jobless growth
has been talked about for quite some time all over the world. But now even India is
witnessing the phenomenon.
6.2 The purchasing power has not increased for many people. There has been practically
no increase in employment in organised sector over the last five years. The concept is that
we have to be competitive and hence increase productivity. China has invested heavily in
infrastructure. Despite the fact that their statistics are unreliable, they have surplus power
and we do not have. Better infrastructure there is visible. In China there is surplus
everywhere, in India we have shortages everywhere. All activities are taking place in a
few cities. 80 percent of telephone connections are only in seven cities.
6.3 The best kind of safety net is good training. A needless worker sitting in the factory is
quite expensive. It is better to keep them upto date. Maximum contribution to growth in
the US was R&D followed by HRD. We consider capital to be the most important factor
and we are a capital wasting country.
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