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Home > Business > Columnists > Guest Column > A K Bhattacharya

The Bombay Club is alive

November 08, 2006

The Bombay Club that flourished in the 1990s wanted a level playing field for Indian industry. It argued that while the domestic industry faced several bottlenecks because of the existing policies and infrastructure problems, imports did not suffer from those handicaps.

As a result, manufacturing companies in India had to face unfair competition from imports.

An extension of the Bombay Club logic was Indian industry's discomfort with what Tarun Das of the CII then described as the "cowboy approach" of foreign companies collaborating with domestic promoters in joint ventures in India.

It was argued that several foreign companies failed to understand the spirit of partnership in a joint venture and used their Indian collaborator only as a matter of convenience because of policy imperatives, thanks to the limits imposed on foreign direct investment (FDI) in several sectors, and the lack of familiarity with the Indian market.

Over the last 15 years, there has been a sea change in the economic policy landscape in India. Tariffs have been brought down. Domestic taxation reforms have taken place. FDI caps have been either removed or relaxed in many sectors. Infrastructure problems persist, but are showing signs of easing.

An Indian company has now little justification to complain about the absence of a level playing field. Not surprisingly, India Inc today is fired by a new spirit of entrepreneurship that is reflected in its growth in India and acquisitions abroad.

As some people would like to believe, the Bombay Club is now dead. That may indeed be true. Most of its founders are either languishing as business houses or have changed tune to face the new world of competition. But the disconcerting reality is that the spirit of the Bombay Club is still alive. Nowhere is this spirit as evident as in FDI policies for sectors where the limits are yet to be relaxed.

Take the case of the retail sector. After considerable effort, the government has allowed FDI up to 51 per cent in the retail sector, but only if the retail operations are restricted to a single brand.

FDI in retail could still come in without this restriction, provided this is used only for sale to other shops, but not directly to the consumers. So, you have foreign retail companies in this country, but they have come here either through franchisee arrangements or in partnership with Indian companies. Once again, partnerships are being forced by FDI policy restrictions.

An almost similar situation prevails in the insurance sector. The present policy allows FDI in insurance companies only up to 26 per cent. The government proposes to raise the FDI cap to 49 per cent. But nobody is sure when that will happen.

Meanwhile, foreign partners of about a dozen insurance companies are looking at various ways of increasing their capital base to grow their business. No one in the insurance industry will question the need for raising the FDI limit, because that helps the insurance ventures gain access to more capital.

Who is opposed to higher FDI limits in retail and insurance? Going by public pronouncements, the Left parties are the most vocal about opposing any relaxation in the FDI policy for these two sectors. They fear that opening up the retail sector to unrestricted foreign players would take away jobs and sound the death knell for millions of small shops in this country.

Similarly, a further opening up of the insurance sector, the Left fears, would undermine the interests of the state-owned insurance industry and the country's economic sovereignty.

And since the Left wields considerable influence over the Manmohan Singh government, most analysts believe that any forward movement on these fronts will happen only after the Left is convinced of the proposed changes.

But if you talk to those who deal with such policies in the government, you might come back with a different perception. It is the large Indian retail players who are more worried about the entry of the foreign players if and when the FDI policy is relaxed for the retail sector. It is not just the fear of the small retail shop-owners.

The big Indian retail chains also want a little more breathing space to grow and expand their businesses without any competition from the foreign retailers.

Similarly, it is the relatively big insurance players who are not completely open to the idea of a higher FDI limit for the insurance sector. Any delay in the opening up can only benefit these Indian insurance players, because the valuation is likely to go up as the business expands.

So, the Left, like many others, may believe that FDI in retail and the insurance should be opposed to safeguard the interests of small shop-owners and employees of state-owned insurance companies. But an equally powerful factor responsible for the policy hold-up in these sectors is the quiet opposition to these changes being voiced by established Indian players.

In short, the Bombay Club spirit is still alive and still remains quite effective.

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