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Smoke out FDI

IF NEW DELHI is really against foreign direct investment in cigarettes and other tobacco products, it should without further ado see that the Industrial Policy -- which ushered in reforms in 1991 -- as also the regulations framed under the Foreign Exchan ge Management Act (FEMA) 1999 unambiguously convey its stand. BAT's indication that it might bid for a higher stake in VST -- it now holds 32.7 per cent -- through the open offer or the preferential route only shows that in its assessment the issue of FD I in this sector still remains open. Significantly, as reports suggest, an inter-ministerial meeting recently deliberated on the negative fallout of allowing FDI in tobacco products. Also, there is no clear pointer on how the Centre proposes to combat th e growing menace of smuggling of cigarettes, although it is in possession of studies which, apart from highlighting the resultant huge loss of revenue, reveal that tobacco MNCs, as part of their market-entry strategies for their global brands, adopt vari ous means to provide impetus to contraband sales.

The Industrial Policy, as it obtains now, only stipulates that an industrial licence is a must for manufacture of cigars and cigarettes of tobacco, and tobacco substitutes. The other stipulation is for a no-objection certificate (NoC) which is anyway req uired in all sectors where an MNC already has a shareholding, to ensure that fresh investment does not result in a conflict of interest to the detriment of existing shareholders. Even the relatively recent RBI notification, of May 3, 2000, on FEMA regula tions confirms that the Centre has shied away from taking an anti-FDI stand; perhaps because it finds the issue sensitive. There is no mention of tobacco products in Annexure A to Schedule I, that contains the list of activity/items for which automatic r oute of the RBI for investment by persons resident outside India is not available. Surely inclusion of tobacco products in the list would have, in a sense, conveyed a message to prospective overseas investors.

What is more, Annexure B to Schedule I, which details sectoral cap on investments by persons resident outside India, clearly conveys an impression that 100 per cent FDI is admissible in tobacco products. This is because it lays down cap for eight sectors -- telecom, housing and real estate, coal and lignite, pharma, hotel and tourism, mining, advertising and films -- and says that for any other sector/activity, other than those included in Annexure A, 100 per cent FDI is allowed. Mr Sikandar Bakht, Indu stry Minister in the first BJP-led Government, was for allowing FDI in tobacco products and liquor on a case-by-case basis, while Mr Murasoli Maran, Commerce and Industry Minister in the present BJP-led coalition Government, has expressed himsself agains t 100 per cent FDI in the two sectors ``because of social implications''. Such shifting of position is best avoided with clear-cut guidelines in the Industrial Policy as also the chapter on FDI in FEMA. And, ideally, given the ramifications of the widesp read contraband trade and the momentum that the anti-tobacco campaign has gathered in large parts of the globe, the Centre should no longer hesitate to ban FDI in this segment.

A simultaneous step that brooks no further delay has to be to ban import of cigarettes currently permissible under the Exim Policy, baggage rules, provision for sale from duty-free shops, and so on. The prescribed procedures simply provide channels for s muggling to the high-tax Indian market, either by diversion of stocks from intended destinations or due to leakages from duty-free trade and import facilities. The provision for free imports from SAARC countries too calls for a review. And while under WT O norms QRs have been removed with effect from April 1, 2001 nothing prevents New Delhi from raising the import duty from the present 35 per cent as a preventive measure as, after all, the WTO bound rate is as high as 150 per cent.