Singh's Song Of Six Pence

Unless one reads the fine print, it’s difficult to figure out some of the reasons that are driving the current decisions. Or even understand the implications of the policies. Once you do, you realise that Jaswant has carefully tried to balance the various pulls and pressures. He has tried to please the foreign investors, important countries like the US, the domestic business community, votebanks and even the opposition within his own party. It’s a kind of give-and-take where everyone feels happy. But nobody really gains or loses, at least in the medium term.

Let’s start with what Arun Goyal, a Delhi-based expert on tariff structure, describes "as a bold step whose implications have not yet sunk in". He’s referring to the customs duty cuts announced on January 9. On the face of it, they were minor ones and in line with the long-term policy to reduce peak rates. But combine the 5 per cent decline in peak rates with the removal of special additional duty (4 per cent) and the appreciation of the rupee, and imports are likely to become cheaper by as much as 20 per cent. "It’s quite drastic and I believe there’s a big game behind the move," explains Goyal.

A critical influence behind this was pressure from the Bush administration. Last summer, Outlook did a story (The Lasso Tightens, June 29, 2003) that detailed how Washington was playing a quid pro quo game. It was sending signals that the US government was willing to help stem the growing backlash against outsourcing of jobs to India only if New Delhi was willing to open up its markets for American goods. Robert Blackwill, the then American ambassador, had said that "we remain concerned about the growing trade imbalance", hinting at the fact that Indian exports to the US were three times more than US imports.

Obviously, the dramatic cut in customs duties will open the Indian floodgates for American and other foreign goods. Indian firms will have to gear up to meet this new challenge or close down their shutters the way some of them did after the first wave of liberalisation in the early 1990s. So, why’s no one opposing it publicly? Simply because several leading industrialists are pro-BJP and feel that some of the cuts will be reversed if their party comes back to power in the forthcoming elections. Or they would be given new sops and concessions in other areas!

What no one realises is that domestic business has actually gained from other announcements. Even from those where it seems that Indian firms have been pushed to the backfoot. Take the case where Jaswant has hiked the FDI caps in energy and banking sectors. Although the ceiling in private banks has been hiked to 74 per cent for normal investors, and 100 per cent for foreign banks operating in India, it’s part of the "just for effect" measures. For, there’s an existing restriction (of just 10 per cent) on voting rights of foreign investors. And it can only be removed through a parliamentary Act; a bill to change this clause is currently pending in the two houses. Until that happens, no foreigner will seriously look at private banks.

The JFE may also work in the energy sector, where the FDI cap has been hiked to 100 per cent in exploration, refining and marketing. Energy experts maintain that it’ll not encourage foreign inflows. Parag Dewan, a Delhi-based expert, explains that "refining capacity is surplus and demand is on the lower side". Global giants like Shell have openly said they wouldn’t be interested in setting up new refineries in India. Even in the exploration segment, their interest has been muted. There is, however, a chance that this may improve due to two recent discoveries by Reliance and Cairns.

So that leaves out the retail marketing segment. The one problem there is that the state-owned PSUs have outlets in all the strategic locations leaving only the crumbs for new entrants. In addition, the profitability of individual pumps is on the decline. It’s estimated that, on an average, each pump needs to sell 200 kilolitres of fuel every month to make money. But already, average monthly sales have dropped to 170 kl, and are likely to fall further to 150 kl if new pumps are opened by fresh entrants. Finally, Dewan says that foreign firms will first wait for the disinvestment of HPCL and BPCL, which will give them a readymade retail base, before pouring money into new outlets.

There was, however, one sector where at least two foreign majors (Hutchison and Singapore Telecom that has a stake in Bharti) were vying to invest fresh amounts. But Jaswant succumbed to the demands within his party and outfits like the Swadeshi Jagaran Manch. And ended up protecting big Indian business houses. In telecom, the FDI cap was retained at 49 per cent for "security" reasons as the home ministry (and the Intelligence Bureau) opposed it. S. Gurumurthy, the SJM’s convenor, explains that issues relating to the services sector, which includes telecom, are currently being negotiated at the WTO. "If we simply raise the FDI cap, what will we give in at the trade negotiations?" he asks.

The security issue is a bogey because the threats are not minimised if an Indian company holds a majority stake. And, as a senior manager in a telecom MNC explains, "India does have unique security problems, but the government needs to come clean on them." What’s even more surprising is that foreign firms already own majority stakes in Indian telecom ventures by exploiting legal loopholes. Consider the ownership pattern of the Hong Kong-based Hutchison Whampoa’s Indian ventures. In the Mumbai circle, Hutchison holds 49 per cent, 41 per cent is with Telecom Investment India and the remaining with Max India. But Hutchison also owns 49 per cent of Telecom Investment India. In effect, its stake in the Mumbai circle goes up to 69 per cent (49 per cent plus 49 per cent of 41 per cent).

By now, one can sense the pattern that Jaswant is pursuing. It becomes even clearer when one looks at his populist schemes: a Rs 10,000-crore fund to lend money to small businesses and a Rs 50,000-crore one to finance infrastructure projects, both at 2 per cent below the prime lending rate. Sounds great. But where’s the money going to come from? Government agencies like NABARD and SIDBI will need to float bonds to raise this money at market rates. And then lend it at much lower rates. But that’s impossible, so the government will have to subsidise this huge loss.

Ila Patnaik, an economist with NCAER, feels that things may change by the time the rbi comes out with the details of these schemes. Moreover, she points out that "they will remain as mere promises unless Jaswant comes back as the FM," or his party wins the elections. Therefore, the BJP is in a win-win situation where it can reduce the scope of, or even give up, these schemes once they win the elections. Or let the new regime decide what to do with them. As with other policies, the BJP factors seem to work only in the BJP’s favour.

by Alam Srinivas with reports from Arindam Mukherji and Suveen k. Sinha