Ironing out the detail is the critical bottleneck
The government has done well to finally hike FDI limits in various sectors such as telecom and, to that extent, this has given a fillip to the stalled reforms process. This was critical since FDI inflows have stalled of late and, as far as FII investments are concerned, there have been nearly $3 billion of outflows from April 1 to July 15. Indeed, getting forex flows is critical since, while RBI’s Monday measures helped the rupee bounce back by 59 paise—by hiking rates 200 bps, RBI made it dramatically more expensive for speculators to punt on the rupee—this is at best a holding operation. With inflation levels slowing down, most were expecting RBI to cut rates which, in turn, would stimulate both investment as well as consumption levels. All of that, however, has had to be put on hold with RBI being forced to come to defend the rupee. Since RBI can’t afford to choke off growth especially in an election year, punters know it will have to lower rates soon. In which case, it was important the government make the most of the limited window provided by RBI and use this to enthuse foreign investors.
To some extent, this is what government has been doing of late. Apart from trying to clear stuck projects, gas prices have been raised to attract investors—RIL has already said that if gas prices are further hiked to $8-10 per mmBtu, it can be looking at $16 billion of investments over the next 5-6 years. Parallel to this, however, various arms of the government have been playing a different game. In the case of telecom where 100% FDI has been allowed, the telecom ministry’s volte-face on 3G intra-circle roaming is still hurting investors; another R38,000 crore of penalties have been slapped on the major private players, giving rise to the impression the bureaucrats are content with imposing the highest penalty, leaving its eventual resolution to the courts. Similarly, after the government risked its future on multi-brand retail, the industry ministry has put all manner of restrictions on wannabe foreign investors. And in the case of pharmaceuticals, though there is no evidence of this, the industry minister has been arguing against allowing foreign pharma firms to take over existing Indian firms on grounds this leads to curtailing of local supplies, rising prices as well as hiking imports. Investors are sure to be enthused by the hikes in FDI limits on Tuesday, but chances are they will prefer to wait for the final details and wait for the fineprint before they start committing big money. Often, the fineprint involves clearances by the FIPB which, often enough, has turned out to be the big bottleneck.