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Opinion - Disinvestment


Stymied divestment programme — A body-blow to FDI flows

S. Majumder

INDIA is a complex nation. It moves one step forward and two steps backward. It sets a reforms agenda with a global view, but does not adopt a similar route to achieve the goal. Privatisation and FDI are recognised as the ways to revive distressed economies, especially the developing countries. Since mid-1990s, cross-border mergers and acquisitions and privatisation have assumed considerable importance. They are now the recognised vehicles for investments into developing countries looking for funds to revive their economies.

In contrast, India backtracks on its agenda of privatisation and that of attracting FDI in deference to the swadeshi lobby, and to please politicians out protecting their fiefs. Have Argentina, Brazil, Malaysia, Indonesia Thailand, and even China, with a FDI-to-GDP ratio much higher than India's, lost their economic sovereignty? In fact, for these countries FDI and privatisation were god-send, and they used these funds to recover in the late-1990s.

India has been reeling under an investment drought for quite some time now. The stock market has been in the doldrums for over four years. Private investors are shying away from making further investments. Of the over 248 public sector units, few make profits; the rest are a mounting fiscal burden on the government. Disinvestment, so far, has provided no relief to the fiscal deficit, as the funds raised from the sell-off barely reach a fifth of the Budget target. In such a situation, how can privatisation be successful without FDI? After a decade of reforms and opening up, it is preposterous to cry that disinvestment of oil companies will endanger energy security, and that FDI will affect our self-reliance.

According to Unctad's World investment Report, privatisation has provided a special form of investment insulation to several developing countries in Latin America, Central and Eastern Europe and South-East Asia. The success of privatisation in these countries was predicated on FDI as domestic sources were scanty or not forthcoming. As a result a substantial amount of FDI flowed into these countries, though their economies were not exactly in the pink of their health.

For instance, in Brazil, of the privatisation proceeds of $90 billion since 1995, nearly 35 per cent was FDI. In Argentina, nearly half of all FDI went into cross-border M&As or for privatisation buys. The privatisation of Telebras, a telecom company owned by Brazilian government, which fetched $5 billion in 1998, and of YPF, an oil company owned by the Argentine government, which fetched $13.2 billion in 1999, are examples of FDI flows. Indonesia, South Korea and Thailand quickly sold nationalised companies to garner FDI to mitigate the impact of the currency turmoil in 1997.

In this backdrop, the recommendations of the N. K. Singh Committee to expand the role of FDI in the economy are heartening. The Committee was right when it suggested that gearing up the sagging FDI sentiment would also improve domestic investment. Its recommendation for raising the FDI cap on three major service sectors and encouraging FDI in government- owned energy companies (such as raising the FDI ceiling from 26 per cent to 100 per cent in oil refineries) are path-breaking. The Committee seems to have read correctly the global trends in FDI and its close relation to the growing privatisation drive. Thus, its recommendation for raising FDI flows through both greenfield investments and cross-border M&As.

Paradoxically while industry hailed the N. K. Singh panel report, the government turned its back, especially when it is crucial for the economy. Some politicians have tried to cleverly point to China — where though no major disinvestments has happened, FDI flows are substantial — to argue that sell-offs are not necessary. But the case of China is different from ours. China has received copious flows of FDI thanks to the Special Economic Zones that it set up in the eastern part; the success of the SEZs came due to Hong Kong, one of the largest trading platforms in the world. Hong Kong serves as the gateway to China and over 60 per cent of the FDI China gets comes from Hong Kong.

There can be no two opinions about the importance of FDI to spur economies in a depressed environment. But to attract FDI incentives alone are not enough, according to Unctad's World Investment Report. Equally important is the economy's capability to absorb and use the FDI. Else, there is a greater risk of investors quitting as soon as they have exploited all the incentives.

The Tenth Plan Approach Paper projects FDI flows of $11 billion by 2006-07 and an average yearly flow of $8 billion during the period. The projection was made based on the assumption of 6.5 per cent GDP growth in the Tenth Plan period. A higher ambitious projection was also made, of FDI flows of $13.1 billion by 2006-07, based on the assumption of 8 per cent GDP growth.

It is not an uphill task to achieve even the highly ambitious target of $13.1 billion, when a single privatisation deal in Argentina (the YPF disinvestment) fetched a similar amount in 1999. Had the BPCL and HPCL disinvestments happened, the government holdings of 36.7 per cent and 26 per cent respectively, would have raised over $6 billion, provided, of course, the entire divested amount was bought in by foreign enterprises. Therefore, merely by raising the FDI cap and encouraging greenfield FDI may not be enough to achieve the goal of the Tenth Plan. FDI through privatisation is equally important.

(The author is Senior Researcher with a Japanese MNC in New Delhi.)

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