By laying down that a company is either Indian or foreign depending on who owns 51 per cent of it and gets to appoint its board of directors, the government saves itself the tedium of determining whether an Indian joint venture’s parents, or grand-parents, are one-eighth, or one-sixteenth, foreign. Where much of this circuitous ‘grand-fathering’ has taken place, in telecommunications, for instance, more room has been cleared for foreign direct investment (FDI). At a fundamental level, however, ignoring proportionate indirect foreign investment makes sector FDI caps, ranging from 26 per cent in media companies to 74 per cent in telecom firms, redundant. Any Indian company can now funnel any amount of foreign money into any industry that is not a public monopoly.
This is a paradigm shift. Our policy on foreign capital has been easing ever so gradually since India opened up to the world in 1991. This despite the fact that we save less than we invest and import more than we export. These two gaps, adding up to nearly 6 per cent of the GDP, have per force to be bridged by money from abroad. India dips into a $1.5 trillion pool of FDI and hopes to draw in $35 billion in 2008-09, a target likely to be wide of the mark in this season of financial turmoil. At 18th place in a league of FDI destinations, a thicket of restrictions keeps multinationals away from the fastest growing emerging economy apart from China.
The economic case for more FDI is incontestable. The strategic argument is trickier. If foreign capital can accompany an Indian company everywhere, the only way the government can effectively keep FDI out of sectors it deems sensitive is by shutting out all private capital. Public monopolies would be an unfortunate throwback after nearly two decades of privatisation, and patently impossible in sectors like the media. Breathtaking in its simplicity, the redefining of FDI solves a big issue but throws up another equally big question. The guidelines that follow this week’s announcement must address both.