Unreal premise

Finance Minister P Chidambaram’s statement that the distinction between FDI and FII limits needs to be removed, is hard to understand. There is a difference between portfolio investment, where an institutional investor is not looking for control but for good returns, and strategic investment, where the investor is looking primarily for control of the company.

It makes sense to argue that FIIs should be allowed to invest up to the stipulated FDI limits, but not the other way round. Since the essential argument for limiting FDI in any sector is the one about strategic industries, it is illogical to say that FII and FDI investment should be treated as one and the same thing—unless the argument is that FII holdings are usually surrogates for FDI through back-to-back agreements.

Given the large amount of portfolio money sloshing around in global markets, this hardly seems a tenable proposition.

Also, for anyone who is familiar with just how opposed the Left parties are to increased FDI limits, and how the government has been unable to hike FDI limits as promised in the Budget, Mr Chidambaram seems to be whistling in the dark.

If the government can’t hike the FDI limits in telecom due to opposition from the Left parties, for instance, how can it hope to allow the substantial FII limits to be converted (for that’s what Mr Chidambaram’s proposal amounts to) into FDI?

In the case of the insurance sector, where all foreign investment, FII and FDI, is regulated by an act of Parliament, how can the government change this without going back to Parliament for its approval, which, it may be mentioned, looks impossible given the current arithmetic in the Lok Sabha?

By saying what he did in London, Mr Chidambaram may have been displaying his reformist credentials to an overseas audience seeking reassurance about the new government’s policies.

The problem with such statements, as the latest World Development Report brings out, is that policy pronouncements that cannot be translated into action only result in policy instability.

And such instability, the WDR says on the basis of global surveys, causes up to a 30 per cent fall in the possibility of fresh investment. It’s worth keeping in mind, in this context, that when the telecom industry was first opened up in 1994 and FDI limits were 49 per cent, there were 30 global players who entered the market.

While most of them have left since, not one has cited low FDI limits as the reason for wanting to quit.

In the case of airlines, similarly, hiking FDI limits by merging them with FII ones is hardly likely to have any impact until foreign airlines are allowed to invest in Indian airlines (today, the policy allows only non-airline companies from abroad to buy into Indian airline companies). In these and other cases, realism can only do good.