Wednesday, April 14, 2010

FDI Policy – Static or Dynamic?

Earlier this month, we had briefly discussed the Consolidated FDI Policy issued by the Government. The policy, which is meant to be exhaustive, would be subject to review every six months, with the first review due on September 30, 2010.

The Business Standard has an incisive editorial about certain intervening events that already signal policy changes within the first month of its introduction:

On April 1, the government came out with a comprehensive document detailing for the first time in one place all its various policy provisions pertaining to foreign direct investment (FDI) in the country. Laudable as it was, the exercise lent clarity to the entire gamut of FDI policy issues. It also created a semblance of stability on the government’s FDI policy front as it promised a review of the policy only twice a year. In other words, the next review of the policy was expected to take place on October 1. For foreign investors, this was a welcome relief as they could at least keep a six-month horizon in mind while they planned their projects in India in the secure thought that no sudden policy shifts would take place in this period. How naive they were must have dawned on them on April 7, when the Union Cabinet Committee on Economic Affairs, the government’s highest economic policy-making body, decided to ban all new foreign direct investment in cigarettes. The comprehensive FDI policy document, announced and made effective just a week before that, had allowed 100 per cent foreign direct investment in tobacco, including cigarettes, after prior permission of the Foreign Investment Promotion Board. While the government’s logic in disallowing fresh FDI in cigarettes may have been consistent with its commitment to reduce tobacco consumption and its overall concern for the health of its people, what certainly defies norms of good governance is the manner in which the sanctity of its own policy document was violated so soon after its enforcement.

… the government’s approach to foreign investment in many areas requires greater and more broad-based consultation. If indeed the goal and the corollary benefits of a six-monthly review of the FDI policy are to be achieved, it is time the government thought of a permanent inter-ministerial body that continually evaluated policy changes that needed to be made and announced twice a year. This would obviate the need for making periodic and often abrupt as well as ad hoc changes whenever the industry ministry thinks it can prepare a fresh press note.

This suggests that certainty in FDI policy may continue to be elusive.


vijay' said...

Even though the policy is aimed at stabilising the environment relating to FDI in India, there seems to certain amount of overlapping in the powers of DIPP and the powers of RBI to issue regulations from time to time by way of AP (DIR Series) Circulars. The Policy not only consolidates and makes all the prior press notes and circulars in to one policy, it also incorporates certain aspects of procedure and guidelines relating to the Forms to be filed, reporting requirements to be fulfilled which have been the domain of RBI. Now the question arises as to what happens when the RBI issues a circular in the interim period and the same is not incorporated in the Consolidated Policy until it is reviewed after 6 months. This will again give rise to circulars and press notes by DIPP. Therefore, it is necessary that all the procedural aspects are left to RBI. The Consolidated Policy must reflect the policy and the approach of the Government alone.

Somasekhar Sundaresan said...

I wrote about the policy here: