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FDI and 'national interest'

July 31, 2003

The controversy over Star TV's shareholding in India would probably never have occurred had the Indian government not suffered from chronic FDI paranoia.

Admittedly, the rather bizarre configuration that Star has suggested complies with the letter of the law rather than its spirit and the government is more than entitled to ask questions.

But was the controversy necessary in the first place? Or to put it another way, does India really need sectoral limits on foreign direct investment?

Established domestic business interests, of course, can always be relied on to argue in favour of FDI caps -- and who can blame them for following global practice.

But the government needs to rise above the pressures of competitive lobbying and consider what politicians and bureaucrats love to call 'the national interest'.

What exactly is this? In the context of foreign investment (especially in the media), we can assume it means upholding Indian traditions (whatever that may be), bringing capital into India and allowing the Indian public to participate in foreign firms' prosperity in terms of shareholding and jobs. Where exactly have multinationals lagged?

Let's consider the case that has exercised India's self-appointed moral police the most: exposing the Indian public to western culture. Let's also set aside the issue of whether the Indian public will be corrupted or not as a result.

It cannot have escaped anybody's notice that Star TV India only started being a commercial success when it Indianised its programming in a big way.

Kaun Banega Crorepati being the starting point and Kyu Ki Saas Bhi Kabhi Bahu Thi -- not The Bold and the Beautiful, mind you -- establishing its leadership.

When it ended its contract with NDTV India, it opted for an all-Hindi channel, not the part-English, part-Hindi one that existed before.

Then again, the radio programming Star runs through its surrogate Mittal-owned FM channel is entirely Hindi music.

Ironically, it is government-owned All India Radio that you need to tune into to listen to western jazz, classical, pop or rock.

Again, the Indian public only started taking notice of Channel V and MTV after the two music channels localised their content substantially.

Turn away from media and entertainment and look at insurance where there is a 26 per cent cap on foreign investment.

India is said to be the only country in the world in which all the global insurance majors have a presence.

Yet you don't see 'men from the Pru,' so to speak, swarming over the landscape hawking the products of the new private insurers.

The agents are Indian and so are the managers, many of them having been recruited from the state-owned monopolist LIC.

The same goes for telecom companies (where at least one service provider has a shareholding pattern that transgresses the spirit of the law): they're run by Indians and have Indian employees, as do foreign banks, consumer goods companies and so on.

It would also be fair to say that in some cases, foreign corporations have helped reverse the brain drain since fairly large numbers of overseas Indians have returned to head the Indian outfits.

The short point is that the fears about unfettered foreign corporations corrupting India's culture and snatching away jobs are misplaced: they have to Indianise and employ Indians simply because that is what the logic of the market dictates.

Foreign insurance agents are unlikely to understand the intricacies of the Indian investor's psyche, for instance, nor can anyone force the vast, diverse Indian public to watch or listen to programming they don't vibe with culturally.

If the government truly wanted to maximise the 'national interest' it should allow for the Indian public to participate in the prosperity of foreign corporations -- and that should be the only cap to which foreign investors should be rigorously subjected.

Of course, it has done so by requiring a dilution of shareholding after a stipulated period of time. The irony is that it is the government that has transgressed the spirit of its own law.

Last year, it allowed Coca-Cola India to privately place a part of its equity instead of selling it to the wider Indian public, setting a precedent that will be hard to break.

It is hard to see how any national interest is being served by the current business structure, which has come into being following a FEMA (Foreign Exchange Management Act) rule on payment of advertising revenue to foreign broadcasters.

Equally, foreign corporations should be subjected to scrutiny in terms of environment and labour practices as rigorously as any Indian company.

It could be argued that sectoral caps made sense at a time when Indian industry was not ready for competition.

It is hard to see how this would have worked -- except to the benefit of the foreign competitor who gains a legal local escort service, as it were. In any case, that argument does not hold now.

As the N K Singh committee on foreign direct investment put it: "With a much stronger and competitive economy many of [the entry conditions] can be removed. This will eliminate minor irritants that are sometimes blown out of proportion by interested parties to the detriment of national interest."

It recommends a 100 per cent equity in most sectors (significantly, not broadcasting). At a compounded annual growth rate of 2 per cent over the past five years, India's FDI inflows are nothing to write about. A more realistic and hard-headed approach to FDI will work much better than confused patriotism.

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