Back to the License Raj?
Another example of the arbitrary interference that is slowing foreign investment into India.
Foreign direct investment into India shrank 22% in 2010, even as foreign portfolio capital increased more than 100%. The main reason FDI has started going elsewhere is the regulatory environment for foreign firms. A good example of the problem is the Cairn-Vedanta saga playing out in New Delhi's corridors of power this month.
Last August, London-listed mining firm Vedanta announced it would buy a majority stake in Cairn India, a local oil explorer owned by U.K.-based Cairn Energy. Shareholders in both firms approved the deal last year. But this $9.6 billion acquisition still hasn't cleared regulators.
India's oil ministry had earlier promised both companies that it would approve the deal by December; it later pushed the deadline to the end of February. Now that deadline also appears improbable, with India's cabinet stepping in last week to offer its judgment. British Prime Minister David Cameron wrote to his Indian counterpart Manmohan Singh recently to express concerns about the logjam.
Delays are one thing, but India is also changing the rules in the middle of the game. Regulators are now haggling with Cairn over the details of the contract that allowed it to explore oil fields in the northern state of Rajasthan.
As per that contract, Oil & Natural Gas Corporation, the Indian state-owned firm that owns a minority share in these fields, would bear the full burden of the royalty owed to the government for extracting oil. But ONGC offers a different legal interpretation of the royalty, which, if agreed to, could suddenly alter the valuation of the fields and imperil the deal. Cairn contests this interpretation, but New Delhi is invoking "national interest" to ensure that its ward's interests be met. Before the deal can go through, Vedanta and Cairn are supposed to give up their right to arbitration on disputes with the government. Both firms have rightly refused.
New Delhi's conduct here is of a piece with the treatment meted out to other investors. Mr. Cameron's letter, for instance, mentions Vodafone, the British firm that's battling a tax case over its 2007 acquisition of one of India's largest telecom operators. New Delhi says Vodafone is liable for $2.5 billion in capital gains taxes for a transaction that occurred between two non-Indian entities outside India. This is the first time such a transaction has been taxed, which is why a Mumbai court had to uphold the taxman's authority last September. New Delhi even changed a technical income-tax provision in 2008 with retroactive effect, just to allow the taxman to pursue the 2007 deal.
Then there's Environment Minister Jairam Ramesh. The problem with his activist agenda isn't just that economic growth is being sacrificed for environmentalism. It's also that Mr. Ramesh's ministry has either reversed local governments who had first given approval to industrial projects (Vedanta's aluminium mining in the eastern state of Orissa last year) or revisited those approvals to keep the company guessing (Korean steel giant Posco's plant in Orissa, finally cleared last month after five years).
Moreover, the minutiae in India's FDI regulations are driving seasoned investors to distraction. In early 2009, the government introduced amendments to its FDI policy that wrought confusion for investors, as they discovered new discrepancies, loopholes and backdoors in the rules limiting FDI. While some of these amendments have since been rescinded or clarified, the lasting effect has been to increase the power of the bureaucracy. Previously foreigners understood they were limited to a certain percentage stake in a company depending on the sector; now in some cases it's up to regulators to set FDI ceilings on a company-by-company basis.
Such arbitrary interference erodes the rule of law and takes India backward toward the practices of the infamous License Raj. Then almost all economic activity was subject to the whims of rent-seeking politicians and bureaucrats. Having largely extricated itself from this corrupt and inefficient morass 20 years ago, why is New Delhi determined to repeat history and drive foreign investment away?
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