August 10, 1998

Foreign investment looks up as the Centre puts Swadeshi on the backburner.

By Shefali Rekhi

When Prime Minister Atal Bihari Vajpayee was finalising the portfolios of his newly chosen cabinet ministers in March, the octogenarian Sikander Bakht hoped that he would not be saddled with industry. "I realised it is a complicated subject," he recalls, "and entails enormous responsibility. I like to gain total knowledge before I take decisions." So when he did get the portfolio, it didn't take him long to learn.

The first to discover this were the mandarins in the department over whom Bakht rode roughshod to reach out and shake the hand of O. Suzuki, chairman of Suzuki Motor Corporation, to resolve the Maruti tussle. Firmly in the saddle in Udyog Bhavan now, the minister is on an overdrive. His mind is set on foreign direct investment (FDI), more precisely giving it a boost. "Signs are good," he says. "They show growing confidence in the Indian economy. Foreign investors have realised that it doesn't pay to ignore India."

With foreign exchange inflows low -- exports have fallen despite the rupee weakening, and external commercial borrowings difficult in view of Moody's downgrading India -- the Government believes that FDI is one way out. After falling for two consecutive months in April and May this year, FDI jumped to a high of Rs 1,594 crore in June, up by almost Rs 650 crore in the corresponding period last year. At 75, new FDI applications were seven more than the figure in the previous month. "We are hoping FDI will match, if not exceed, last year's $3.1 billion (Rs 13,020 crore)," says an official of the Foreign Investment Promotion Board.

Some of the optimism may, however, be misplaced. Much of the money that came in June were in projects where investment decisions had been made much earlier. For example, as much as Rs 562 crore was brought in by Telecom Investments India Limited from Mauritius to settle the sellout by Bhai Analjit Singh, one of the promoters of Hutchinson Max, the premier cellular operator of Mumbai. Another Rs 200 crore came from Monsanto, one of the largest life sciences companies in the US, to pick up a 26 per cent stake in the Maharashtra-based seed giant Mahyco Ltd.

The other major inflows in June were in the automobile sector. The Hyundai group from South Korea brought in Rs 165 crore for the small car project in Sriperumbudur in Tamil Nadu while an additional Rs 100 crore came from Mercedes Benz for its Pune car project. With money flowing essentially into such ongoing ventures, investment watchers prefer caution. "A lot of these inflows are for projects that are underway," echoes J. Rajagopal, managing director (consulting), KPMG, a global consulting firm. "New investors are not yet upbeat on investing in India. The Government needs to send out more positive signals that the country is still an attractive destination."

On its part, the Government is galvanising itself to lay out the red carpet for investors from abroad. On July 14, the Prime Minister's Office called a meeting of secretaries to do some tough talk on foreign investment flows. The message was clear: the ratio of inflows to approvals has to improve, failing which, there could be trouble on the balance of payments front. This in turn would mean bidding goodbye to all hopes of putting the economy back on track. Right now, inflows at Rs 38,875 crore are a mere 23 per cent of approvals totalling Rs 1,68,525 crore since 1991. In infrastructure sectors such as power and telecom, it is an abysmal 10 per cent. A recent paper prepared by the National Council of Applied Economic Research (NCAER) shows that in the Latin America and South Asian economies, it is between 40-50 per cent.

At Udyog Bhavan, Bakht and his men are working overtime to woo potential investors. Approvals this June were worth three times those in June last year. And since the Vajpayee Government took office, projects worth Rs 9,759 crore -- 20 per cent more than the figure in the same period last year -- have been cleared. There is also a move to expedite clearance for smaller projects such as those in software, electronics, agriculture, auto-ancillaries and bio-technology, where the time gap for inflows is much less.

As for large projects in the infrastructure sector, the Government has appointed monitoring officers in the administrative ministries which are expected to send regular feedback on the status of projects to the nodal officer in the Industry Ministry. As another gesture, the ministry wants to accord automatic approval facility to more sectors. It is considering a policy move for sectors such as roads, ports and non-conventional energy sectors. Elsewhere, the Finance Ministry is working to convince other cabinet members to permit foreign investors in the insurance sector.

The Government is hoping this will help more intentions turn into reality. Compared to other south Asian economies, India has been presenting a stable picture on the currency front; its market is large and still growing. Says Nha Hoang, head of global business development for Monsanto: "Investors do view India favourably. We are bullish about making our third investment." Masaru Asada, chief representative of The Yasuda Fire & Marine Insurance Company -- Japan's third largest insurance firm -- agrees. "We are interested in investing in the Indian market. There is a lot of potential and we can bring a lot of our products here," he says.

Intentions apart, research by NCAER shows that FDI really begins to surge into a country as the 10th year of its reforms draws closer. "Reforms in India began in 1991, so we are not far off," explains Laveesh Bhandari, senior economist with the organisation. "If we do take the right steps, I don't see why inflows cannot exceed $10 billion (Rs 42,000 crore) per year. Even that would be peanuts compared to the actual potential."

For that to happen, the Government will have to make up for the substantial time lost in the first few days of its tenure when the swadeshi brigade made threatening noises. Investors viewed these as anti-foreign investment. The Government moved quickly to dispel these fears. As Ramesh Bajpai, executive director, American Business Council, points out, "There was some concern in the beginning but the Government was quick to clarify. Investors do not doubt its desire to attract FDI. But the policies must remain consistent."

Unfortunately, that has not been the case. For instance, Power Minister R. Kumaramangalam's suggestion to states to hike electricity charges so as to push up the bottom lines of electricity boards raised the hopes of potential investors. But his backtracking in the face of political opposition did not go down well with them. Despite such hiccups, FDI is looking up. Rather than get tizzy over it, the Government needs to firmly act on its long-term policy initiatives. Bakht has made a beginning but the efforts will have to be sustained.

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