Improving Investment Sentiment

Economic Times, May 28, 2012

By Pradeep S Mehta

When Coca Cola, among other foreign consumer goods manufacturers, was allowed to return to India in 1990s, it was not because we needed Coke, but to send the right signal to the world that we were interested in doing business with the whole world.

Other than promoting healthy competition, our domestic capital availability was limited. We need foreign investment to meet our growing needs, for example, in the infrastructure sector. We would need over a trillion-dollar capital in the near future to sustain our growth. The problem is that many cannot see the big picture, or myopically pursue their self-interests.

While the proposed policy of FDI in the retail sector allows states to agree or not, government wishes to send the correct message to investors that foreign capital is welcome. Already, big domestic business in India has started retail chains, and foreign companies can provide healthy competition to them. The envelope will expand and crucial linkages to rural infrastructure with lower farm losses, benefitting both farmers and consumers, etc.

Evidence from around the world shows how traditional small retailers did not suffer in most cases, but this is one big source of opposition. Both consumers and farmers have welcomed the move, with some caveats. Alas, the debate has got snared in silly politics, promoted by vested interests.

Civil aviation is another infrastructure area hamstrung by vested interests. Former civil aviation secretary M K Kaw has written about how the plans of Tatas to partner Singapore Airlines were scuttled by Jet Airways in 1997. In his recent book, An Outsider Everywhere: Revelations by an Insider (Konark), Kaw writes that then-minister C M Ibrahim did not clear the file, despite several attempts on his part. “The history of civil aviation in this country would have taken a different trajectory.”

Private airlines were also responsible for the delays in Air India’s plans to acquire new fleet, as narrated by former Air India executive director Jitender Bhargava in a signed article in Mumbai Mirror on May 8, 2011. On the current scenario in Air India, Kaw says, “It is a story of shameless exploitation and ruthless corruption.”

An important lesson from Kaw’s confessions is that he was also accused of favouring Tatas by Jet Airways. This is the bane of our system: when officers have to deal with a specific issue, they run the risk of being maligned unnecessarily, even though the decision is in national interest. No wonder, nowadays, officers are hesitant to support a decision even in national interest, because it will appear to be favouring a particular party.

The current imbroglio about the 2G scam makes an interesting case study of how performing babus were also hauled up by our authorities, though some of them were clearly in league with the perpetrators. Whatever be the merits or demerits of the scam, it has and will affect the investment climate in the country, both domestic and foreign. Therefore, the government will have to find a way out of it to restore the faith of investors in our ability to be fair and just.

Following the splendid order of the Supreme Court that all the 122 licences granted to mobile telephony players be cancelled and new auctions for the spectrum be held, the retired chairman of the Telecom Regulatory Authority of India (Trai) went overboard in making impractical recommendations. The DoT also questioned the wisdom behind these heroic prescriptions.

To begin with, Trai invited suggestions from the public on how it should proceed in devising a new way to auction spectrum. It then drafted a detailed questionnaire on the basis of the preliminary inputs. Then it heard the parties, but went ahead with recommendations that appeared as to be targeted to reducing our huge fiscal deficit, as if spectrum fees was the only source left to fill the gaps, without any thought to the bigger picture.

The proposal on the highly-controversial retrospective capital gains tax on Vodafone to narrow the deficit is another story, but in the same genre. Or perhaps, the prescriptions were proposed at the behest of vested interests.

Much has been written about the debate on the spectrum auction and licences is full of numbers about the reserve prices, megahertz, etc.

But one stark fact is that, according to our conventions, no departing bureaucrat should recommend a major policy change, and that he should pass on the baton to his successor. It is, therefore, that the hurried recommendations have raised such a controversy. The counter-claim can be that he was acting fast to comply with the Supreme Court’s orders.

The whole episode has caused a huge furore among foreign investors, with the Norwegian trade minister, Trond Giske – in defending the case of Telenor – warning us about the huge negative impact such ideas will have on our investment climate, and demanding that the government reject Trai’s proposals.

Surely, whatever comes out of the imbroglio, our policymakers should heed this advice carefully and find ways to resolve the matter so that our investment climate, not just the telecom sector, does not suffer adversely. Furthermore, strategic interests should also guide our policymakers in this case, so that our relations with Norway, Russia, UAE, UK, etc, are kept in mind when resolving this mess.

The author is secretary general, CUTS International.

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