STRUGGLING TO REFORM: Finance Minister Jaswant Singh and Maran stand isolated

It was the perfect antidote. At least that is what a section of the Government believed. Its contention: the deferring of disinvestment in oil PSUs, HPCL and BPCL, earlier this month had given the NDA Government an anti-reforms image. To correct this perception "it was imperative to send positive signals to domestic and international investors". What better way to alter the mood than to accept some recommendations of Planning Commission member N.K. Singh's mint fresh report on boosting foreign investment? India's poor ranking at 119 behind Pakistan in unctad's World Investment Report 2002 on competitiveness added ballast to the argument.

Nearly 24 hours before the Cabinet met at 5.30 p.m. on September 18 at the prime minister's residence, the spin doctors began work. Everybody who was willing was convinced about the acceptance of three crucial recommendations: hiking of sectoral equity caps for insurance from 26 to 49 per cent, that of mobile and basic telecom from 49 to 74 per cent and opening up of domestic airlines to foreign airlines and raising the limit from 40 to 49 per cent. It seemed the acceptance of the recommendations was a "done deal" and that an announcement was merely a formality.

Figures are annual FDI inflow in $ million

The votaries of counterspin, however, had discounted the original mantra about economic reforms in India. Change in India is either the result of a change of personality or a response to a crisis. But there was neither a change in personality nor was any major crisis round the corner. Commerce Minister Murasoli Maran, who was confident about Communications Minister Pramod Mahajan's consent on hiking of the sectoral cap in telecom, found himself facing resistance not just on telecom but in civil aviation too. The real opposition was in allowing foreign airlines to have a stake in domestic carriers. Other ministers reminded Maran that since Civil Aviation Minister Syed Shahnawaz Hussain was not present, the decision on airlines should be deferred.

After four hours of wrangling over procedural issues, the meeting wound up. It did not discuss the proposals on special economic zones (deemed necessary to beat the Chinese). Neither were the recommendations of the Singh Committee on anomalies in foreign investment laws, the need for a new investment law or the need for focused marketing of India touched. The Cabinet took the predictable route out by deferring a decision on the report.

Next morning, the spin doctors found to their dismay that the antidote had only altered the perception for the worse. It was yet another reminder that in India, economic reforms (or good economics) continue to be hyphenated with realpolitik.

The sad irony is that at no other time has the need to push foreign direct investment been greater for the Indian economy. The Planning Commission's target of 8 per cent GDP growth (reiterated so often by the prime minister) is not a mythical number. There is sound economic logic to it. India's burgeoning population, debt and fiscal deficit are sustainable only if the country's economy grows by at least 8 per cent annually. This requires raising the level of investment from around 22 per cent of the GDP now to nearly 30 per cent. As the Panchatantra fable goes, only when pebbles are dropped in the pot will the water level rise. Foreign investment is the pebble and it should touch $8 billion (Rs 38,800 crore) if India has to achieve 8 per cent growth.

What is India's record in collecting pebbles? India is the 12th largest country in the world in terms of GDP at current exchange rates but it has attracted foreign investment equal to only 0.9 per cent of its GDP. Worse, several billion-dollar corporations like Cogentrix, Marathon, Mission Energy, British Telecom, Swiss PTT, Bell Canada, Nynex, Telstra and Caltex and banks like Commerzbank and DKW have exited from India.

To get a perspective of the opportunity lost consider this. Between 1991 and 2001, China received $322 billion of foreign investment whereas India huffed and puffed but got only $22.47 billion. K.V. Kamath, managing director and CEO of ICICI Bank and an old China expert, says this is because "China has delivered more of its promises than India".

It is not just China. Consider Poland. Emerging out of the iron curtain around the time the Indian economy started opening up in 1991, its GDP growth shot up from 0.6 per cent to 6.2 per cent. By 2000, it had raked in $36 billion of foreign investment, a large part of which came through its privatisation programme. In contrast, India has not earned a cent through privatisation.

Last year, Prime Minister Atal Bihari Vajpayee asked investors in Osaka why they weren't coming to India in a big way. The academics and corporates there produced a laundry list ranging from absence of direct flights to lack of socio-cultural links to procedural hassles and bottlenecks. But lack of potential was clearly not an issue.

In fact, a recent McKinsey report reveals that India has the potential to attract over $100 billion of foreign investment in the next five years, or $20 billion every year. Nearly half of this will be in the four core sectors of telecom, energy, financial services and food products. But it also adds that India must first sort out the mess on the ground. Shirish Sankhe, partner McKinsey observes, "Investors take market risk in their stride. What they can't and don't accept is the inability to start due to policy uncertainty and implementation issues."

Add red tape, antiquated labour laws and flawed policies to investors' woes. Consider just one nugget: size brings both quality and economies of scale. But India believes small is beautiful so looms get preferential treatment. Result: China and Thailand bag investment and Indian garment makers are now importing fabric.

Ironically, the largest investment since 1991 is not by any MNC but the Rs 14,500 crore grassroots refinery set up by Reliance Industries. Its Vice-Chairman Anil Ambani rasps, "If only the Government gave a fraction of the time spent on pampering foreign investors to Indian industry, the industrial scene would be very different."

Hidden in this caustic view is the mantra: the Indian Government needs to fix domestic policies to garner more foreign direct investment. The Singh Committee report, with comprehensive inputs from ministries, the RBI and industry, recommended precisely this but unfortunately the political focus was on sectoral caps.

Singh himself though is not disappointed and provides an optimistic view. The deferment, he believes, is a positive step. An overall review "will be more rational and lead to greater convergence of views if the group of ministers considers the proposal in its entirety for subsequent cabinet consideration".

Singh's optimism could be the antidote.