FDI Policy: Largely Symbolic

The relaxation of policy governing foreign direct investment announced earlier this week has evoked reactions from critics as well as supporters, the strength of which in both cases is quite unwarranted by the significance of the changes effected, especially in terms of their likely impact on the actual inflow of foreign investment into the concerned sectors. The government has decided to allow 100 per cent foreign equity in crude oil refining and in e-commerce; in power projects, where 100 per cent equity is already permitted, the ceiling of Rs 1,500 crore on FDI proposals cleared through the automatic approval route has been removed. Finally, the requirement that foreign companies in 22 consumer goods industries had to bring in, within a specified period, foreign exchange through exports to balance their foreign exchange remittances on account of dividends has been done away with.

The least significant of the policy relaxations, in terms of their immediate impact, curiously are the ones pertaining to the seemingly critical sectors, power and petroleum. In both cases wide-ranging domestic policy reforms are immensely more crucial. It is beyond doubt that in power, without basic restructuring of distribution to take it out of the hands of the state electricity boards, very little foreign investment is likely to flow in, except with government guarantees and on onerous tariff and other terms which, as has already happened in the case of the FDI-funded power projects cleared in the early phases of power sector reform, will be disastrous for the long-term health of the sector. In petroleum too the progress of domestic reform has been tardy in terms of dismantling of administered prices and opening up of marketing of petroleum products to competition. A piquant situation has arisen, though, with on the one hand the government permitting 100 per cent foreign equity in petroleum refining and on the other the petroleum ministry demanding that petroleum be declared a strategic industry and the proposed divestment of government equity in public sector petroleum undertakings put on hold on that ground.