With Retrospective Effect?

THROUGHOUT the five-year libera-lisation programme of the Narasimha Rao government, the constituents of the current United Front Government had consistently maintained their opposition to foreign investment in the consumer goods sector. Their argument—that it was unnecessary, a diversion from India's goal of self-reliance, and that it resulted in huge amounts of foreign exchange outgo—cut a lot of ice with sceptics of the Rao policy thrust.

But for all this fiery nationalist rhetoric, the United Front Government's eventual policy on foreign investments in the consumer goods sector has turned out to be a damp squib. Surprising, because such a policy decision would not entail a massive reduction in potential foreign exchange inflows. Considering that only 5 per cent of the foreign investment approvals given by the Rao government related to investments in the consumer goods sector.

Yes, the Government has said that it would "discourage transnational corporations (TNCs) from investing in non-priority areas through the use of fiscal measures", but it has refrained from specifying the definition of both non-priority areas and fiscal measures. It has, for the time being, been left to industry to interpret these vague policy pronouncements, till the finance minister or industry minister reveals more. In any case, the words 'discouragement' and 'restriction', as envisaged earlier, connote totally different things.

 "It is not known what the Government means by fiscal measures. Maybe the TNCs will need to pay more taxes," says Siddharth (Shunu) Sen, marketing adviser to the RPG Group. And even this 'discouragement' may be too little to defer TNC investment, given India's booming markets, and too late considering that most TNCs in the consumer goods business are already in India. "Every major consumer electronics TNC is already in India. So the Government's new policy will not have any effect whatsoever on us," points out S.C. Gupta, director, Baron International Limited, Japanese giant Akai's joint venture partner in India. Ditto other industries like automobiles, beverages, breweries, fast food and cosmetics (see table).

Besides, the Government has also left itself an escape door, with Industry Minister Murasoli Maran announcing that foreign investment in the consumer goods sector will be welcome as long as it related to hi-tech areas and did not affect the domestic industry. But again, "hi-tech areas" have not been defined, and exactly what sort of effect on domestic industry the Government has in mind has not been made clear. But the latter condition, feels Gupta, might just adversely affect the chances of those TNCs which were planning to come into India with 100 per cent subsidiaries. He adds that those with Indian partners might be permitted, on the grounds that their entry will not have an adverse impact on Indian industry. The Government has also given indications that TNCs wishing to invest in consumer goods in the future will be allowed to do so, if they invest in infrastructure areas as well.

At the same time, TNCs already in India heaved a sigh of relief when the Government said that all contractual commitments made to them by the Congress government will be honoured in toto. In other words, TNCs were free to expand and diversify as they wished. "Until or unless the Foreign Investment Promotion Board (FIPB) clearance is project-specific, where there are limitations on investment and capacities, TNCs which have got company clearance should not have any problem in expanding or diversifying their activities, at least from what it appears," says Abhijit Bhaumik, director at Corporate Catalyst (India) Private Limited, a management consultancy which devises India-entry strategies for TNCs. He notes that project-specific clearance is usually given in high investment infrastructure projects, like power and telecom, while most consumer goods companies get company clearance.

Besides, the option of licensing brands, rather than setting up manufacturing capacities, is always open to TNCs. All that they have to ensure is that fund repatriation takes place as per government norms. But the option of setting up marketing offices and resorting to third party sourcing—which a lot of TNCs have been doing in the past—is not open since marketing is regarded as a service and requires FIPB clearance.

More than anything, it is the new Government's decision to shift the FIPB from the Prime Minister's Office (PMO) to the Industry Ministry and to issue clear-cut guidelines on foreign investment—at a later date—that is a cause of worry to TNCs which have not received their FIPB clearance as yet. "The earlier government did not have clear-cut guidelines on foreign investment, and this allowed practically all TNCs to come into India. Now TNCs might have to conform to these guidelines, as and when they are issued, and this might make entry into India tougher," says a senior executive of a TNC on the condition of anonymity. But then that applies to all TNCs and not necessarily those manufacturing consumer goods.

 For TNCs in the consumer goods sector which manufacture two and three-wheelers, soya products, and food processing TNCs (other than those manufacturing milk foods, malted foods and flour, and operating in areas not restricted for the small scale), manufacturing in India should not be a problem. That is, if they don't wish to hold more than 51 per cent stake in their India operations, and go in with a joint venture partner. That's because these industries are part of a list of 36 industries which don't need to go through the FIPB route if the foreign partners holding is 51 per cent or less—mere RBI clearance is enough for them. This clearance in any case is automatic.

So what does the consumer lose out on? "Most of what Indian consumers want is already here," says Sen. Also highlighting the fact that due to restrictive regimes of the past, Indians have acquired this knack of getting every foreign brand they want. The only question is the price paid, and whether they acquire it legally or illegally.

The new United Front Government has thus played out the perfect instance of locking the stable doors once the horses have bolted. And it hasn't done too good a job of that either.