Not by FDI alone

While the government appears to be sticking to its guns on increasing foreign investment limits in areas like telecom and airlines, it could be argued that the issue is getting overblown; FDI limits in these sectors are not the most important issue, nor the most urgent.

Far more important is the country’s investment climate and whether the government/regulator protects the legitimate interests of investors. Indeed, when the country first opened up to foreign investment, there were over 30 top foreign telecom players lining up (at the time, the FDI limit was also 49 per cent), whereas today there are fewer than a handful left. When these firms left the country, none of them cited low FDI limits as the reason for their departure.

What they were concerned about was the lack of clarity on policy, how they were not getting enough spectrum, how it took forever to get interconnect facilities with government-owned companies, and so on. Indeed, while the government appointed a telecom regulator to deal with such issues, there are virtually no instances of the regulator pulling up government companies for playing dirty with newcomers. And how could there be, with officials regularly moving from government jobs into the regulator’s office, and vice versa?

In the few instances of the regulator trying to provide a level playing field, it was over-ruled and in one memorable case, the entire regulatory body was dissolved! Far from pulling up the incumbent for anti-competitive practices, the regulator has actually got private firms to contribute to the incumbent’s (BSNL) kitty through an access deficit charge.

For years, private telecom players have been asking the government/regulator to get BSNL to separate its accounts, to ensure it is not using profits from one business (domestic long distance) to subsidise another (mobile) business. There has, however, been zero progress on the matter.

What should interest those taking part in the FDI debate is that few developing countries seem to be allowing more than 49 per cent FDI in telecom; indeed, China has just about begun to allow FDI in telecom, and that too on a case-by-case negotiated basis, in one city at a time, and for minority shareholding.

It is only by January 2007 that China has committed to opening up to even India’s current level of 49 per cent FDI, and with the geographical restrictions removed.

By the end of this year, China has committed to allowing just 25 per cent FDI in basic services like mobile, and that too in only the three areas of Beijing, Shanghai, and Guangzhou, with the proviso that the joint venture will have equity capital of at least $250 million. Yet, foreign investors have lined up waiting to get in.

Today, all of China’s 300 million mobile subscribers are serviced by two government-run companies. Yet, the very fact that the Chinese market is so lucrative resulted in China Mobile being able to raise $2.5 billion when it sold a 2.5 per cent stake to Vodafone a few years ago, and others in the race included Deutsche Telecom, NTT and DoCoMo. On sales of $16 billion today, China Mobile has a profit of $4 billion.

In the case of airlines, similarly, the issue is not so much one of raising the FDI cap from 40 per cent to 49 per cent, but of allowing foreign airline companies to invest in India. Since this is not allowed today, it is unclear as to just which foreign firm would like to invest in the airline sector.

And once this is allowed, the issues that will then become important will be the extra benefits given to the government-owned Indian Airlines—today, despite a reduced market share, IA gets a full terminal to itself in airports like Delhi and Mumbai while the private airlines are cramped into a much smaller terminal.

The real thing that investors are looking at is the country’s investment climate. Focusing on the divisive FDI question is to evade this issue.