The United Progressive Alliance government dealt its first major snub to its Left allies as Finance Minister P Chidambaram, in a 14-page note on the foreign direct investment ceiling in telecommunications, said the investment needed in the sector was so large it could come only through foreign investment.
The note also demolished the Left argument that more FDI meant vulnerable security, by asserting that ownership of companies had no correlation to security.
It said Indian companies with 26 per cent equity would have management control to stave off fears of security being imperilled.
Chidambaram's note came minutes before a Left-UPA coordination committee meeting held on Tuesday evening.
His note was cleared by a high-level meeting of the political affairs committee of the Congress chaired by Congress President Sonia Gandhi where a decision was taken to let the Left know that support or not, the government would not be prevented from carrying on its work.
The note said Rs 160,000 crore (Rs 1,600 billion) were required to sustain the phenomenal growth in telecommunications.
"The recent growth in the number of phone connections has been exceptional, but to sustain this growth and to achieve a network coverage of 70 per cent as against the current 20 per cent, we require investments on an unprecedented scale, which is possible only with FDI," the note said.
"Even if domestic capital of this magnitude were to become available, which is doubtful, it would certainly be at the expense of investment in other sectors where foreign investment may not enter as readily," the note said.
The note recalled that in line with India's commitments to the World Trading Organisation in the General Agreement on Trade in Services, the telecom sector had to opened up anyway.
The note listed examples of several countries, including developing countries such as Argentina and Brazil, that had FDI regimes more liberal than India's in telecommunications. In fact, many countries did not have FDI caps in telecommunications at all, the note pointed out.
In the context of Left fears that one or two players might come to dominate the market and that the easing of FDI rules was being pushed by the cellular lobby, which wanted to make a windfall and exit, the government said these fears were illogical.
"A key factor for telecom growth is the cost of services... if indeed it is clear that many cellular players are looking to exit the market, then it becomes imperative to allow FDI to prevent the market from being captured by one or two large players" the note said.
The note also dealt summarily with the Left parties' objections that higher FDI in a strategic sector could jeopardise India's security.
Chidambaram said ownership of a telecommunications company had 'little correlation' with vulnerability to illegal access to information by enemy nations.
Chidambaram's note confirmed the Left's worst fears, that the government was going to go ahead with hiking FDI caps in the telecommunications regardless of its objections.
It also demonstrated fresh resolve on the government's part to plough ahead with a semblance of economic reform, whether the Left backed it or not.
"If they are so exercised about the way we are running the government, they should join us. The government cannot be prevented from doing its work.
They must remember that they are just 60 compared to our 130," said a Cabinet minister just before the coordination committee meeting.
Left's argument
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Telecom companies have large reserves to meet capex needs.
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Teledensity is rising in India despite low FDI.
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Intelligence agencies against hike in FDI cap; cite security concerns.
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FDI cap in countries like China capped at 49% or less; cap in US at 25%.
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$2.5 bn investment needed a year; only higher FDI can deliver.
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More FDI to hike network coverage from 20% to 70%.
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Higher FDI has "little correlation" to illegal access of information by enemies.
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A large number of countries, including developing ones, have lifted curbs.
