'FIPB heave ho good' | india | Hindustan Times
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'FIPB heave ho good'

Three cheers for Jaswant Singh as he winds up FIPB and increases cap on FDI in banking, writes Dr Bhaskar Dasgupta.

india Updated: Feb 03, 2004 22:43 IST

The week in the Sensex was up and down. It started down on Monday with selling pressure on all sectors. This was mainly driven by profit taking by the institutions. Tuesday morning saw a dip and then rose. Jaswant Singh's mini budget (more on that later) helped push the Sensex up by creating interest in consumer, automotive and other sectors. The Sensex closed up at 6133. Wednesday saw the Sensex moving up again. SBI was up following rumours that the bad loans problems will be reduced following a good monsoon and high growth. Foreign and local funds were heavily involved in purchases and the Sensex closed at 6194.

Unfortunately, the last two days saw a regular bout of profit taking, with the Sensex falling 130 points on Thursday and falling below the 6000 mark on Friday at 5946 following fears of a slowdown in FII inflows.

Jaswant Singh was hyperactive this week. The first was when he gave the Foreign Investment Promotion Board (FIPB) the old heave ho. The FIPB was not foreign, not looking after investment, wasn't doing any promotion and was certainly stiff as a board. So now the FIPB will be wound up. All investment proposals will be routed to the RBI for automatic clearance with the exception of a small number of cases which will be handled by the relevant ministries or the Cabinet. The son of FIPB would solely concentrate on promotion. This follows on from the announcement week before by reducing the role of his ministry in cases for external commercial borrowings. It is so interesting and refreshing that a federal minister actually is interested in reducing bureaucracy.

While this federal bureaucracy reduction is good, but the states are still not addressing it. Here are some extracts from an email which I wrote to colleagues which talked about how SSI's are hit by bureaucracy. "After helping run SSI's in Pithampur (auto ancillary, plastics and agricultural equipment fabrication), I can well tell you that the major problem is the bureaucracy which is built into the state policy structure.

"The number of times that I have run around trying to get excise duty documents, or import duty exemptions, or getting working capital, or getting another transformer, or trying to sort out the labour department is something which has to be experienced to be believed. Scaling up. Yes, indeed, it is indeed a question to scale up. Lets see now, where would I get more money from? Long term funding, that is. Should I go to the IDBI? Or shall I try the State Bank of Indore or India? Or shall I speak to the MPSDC? Should I try PNB? Ok, lets say I try the SBIndore.

"Have you seen the application document? If I wanted to get 5 crores (not an unreasonable sum of money to move up from a 50 lakhs company to a middle scale company), it is almost impossible to get through the financing aspects. Then I need more land. I look around and there is no space adjacent to mine, so I go off to buy a bigger plot. Oops, I hit the dreaded Pithampur development authority. Still, after greasing palms and drinking innumerable cups of tea outside the paan streaked offices, I manage to get authorisation to purchase the land. Now I need some better equipment. Let's say I was using an induction
furnace of 20 cms and I want to move up to say 2 meters so that instead of tappets, I can make crankshafts. Unfortunately, I have to get it from an Italian company. So, I have to speak to the bank, the customs people, the transporters. Ufff, that's interesting and I wont go into detail into the intricacies and challenges of that issue.

"Then think about trying to take your goods across state lines. Then think about getting your money released if you are in the unfortunate circumstance of selling on credit. Then the issues around selling to public sector and governments and trying to get your money back from them. And so on and so forth. It is not easy for a single or two people to handle the sheer headaches which are incumbent on moving up from SSI to MSI level. The government is sucking all the money out of the system so there isn't enough for the SSI's, the labour laws are so damn difficult to navigate that if I move up beyond 100 workers, my life immediately turns into a hell, the state laws are nasty, bureaucracy just kills me. What do I do? I keep small, manage on a cash basis, sell locally and basically try to keep under the radar of the state apparatus.

Not stopping at that, Jaswant Singh decided to throw in an increased cap on FDI in banking companies from 49 per cent to 74 per cent. Besides the banking companies, the caps in the petroleum and natural gas, scientific publications, and telecom companies are raised even higher. The government is also working very hard to float the oil companies such as ONGC, GAIL, IBP, etc.; hopefully the Supreme Court's decision will not stop these big boys moving into the private arena. Once we look back over the past few year's, we find that this liberalisation is helping, India's exports have zoomed up to almost 1 per cent of the world's since 1995, up from about 0.6 per cent.

Interest rates for consumers are coming down quite seriously. A 0.25 per cent drop in home mortgage rates is going to help reduce the pressure on home owners.

Both IDBI Home finance Limited and the State Bank of India have decided to reduce the mortgage rate. We have not concentrated on the mortgage market yet in these columns. India is one of the countries with the largest number of privately held dwellings. One thing which people forget is that India has a very good property law. In other words, there is clear demarcation of who owns what and where. There is also a very good secondary market in housing.

This means that households have a source of personal assets which is legal and concrete. Unfortunately, because of the non-availability of housing finance till about 10 odd years back, financing of housing units was driven by family assets or savings which meant that purchases of housing were slow and were done rather late in life. Now, given the availability of cheap housing, this market has exploded and is indeed a good thing. Now the only thing which is remaining is to take care of a good building code but that is a much bigger fight. Availability of safe housing is something which will have to wait, unfortunately, till a massive accident happens and thousands are killed.

Even then, the bureaucrats will not budge. The builder-politician-babu nexus is too well known but the rise of good builders in the metro's, who are concerned about their reputation, will hasten the arrival of a good code.

Just a few months after I talked about the biggest overseas acquisition by an Indian company, that record was overthrown by Reliance which purchased the US-based Flag Telecom for $211 million. Flag Telecom is a provider of business telecommunication services and is well thought of as a telecommunication infrastructure company. Good going there guys.

(Dr Bhaskar Dasgupta writes a weekly Monday round-up on markets and indicators. He holds a Doctorate in Finance and Artificial Intelligence from Manchester Business School and works in London in diverse capacities in the banking sector.)