Convergence Plus Journal

Rajendra Prabhu

NEW DELHI -- A committee headed by Planning Commission member N.K. Singh, a former bureaucrat said to be close to Prime Minister Atal Bihari Vajpayee, recently recommended raising FDI (foreign direct investment) ceiling to 100 percent in several sectors and to 74 percent in telecom where it is now limited to 49 percent. While this is good news, analysts believe there are many roadblocks even now.

For instance, if the government accepts the recommendations to hike FDI ceiling across the board in almost all sectors, the economic-reforms agenda would move into the second phase. But, the recent emergence of a coalition within the ruling coalition wanting review of the reform agenda itself, will be a damper, analysts say. Will the FDI ceiling be specially raised in telecom? Even the Communications-IT Minister Pramod Mahajan has backtracked on selling off the public sector telecom units and wants to see the two leading ones -- BSNL and MTNL -- merged into one, and is talking of government’s need to go into non-profitable areas for which he would obviously use the PSUs.

The same day this report was published, a powerful group of Ministers from several partners in the ruling coalition at the Center got together and forced PM Vajpayee to postpone his decision on disinvestment in two oil sector public sector units HPCL and BPCL by three months. Leading the group, Defense Minister George Fernandes called for mid-term correction to the economic-reforms process while the PM had called for pushing ahead with the reforms in his Independence day speech only a month back.

The recommendation for raising the FDI ceiling has had mixed reactions in industry circles. The Cellular Operators Association of India (COAI) called it a step "for significantly increasing foreign investment inflows into the telecom sector." COAI said it would go "a long way toward funding the expansion plans as well as setting up of new infrastructure by telecom operators." S.C. Khanna, secretary general, Association of Basic Telecom Operators (ABTO) added that ABTO had been asking for raising the FDI limit beyond 49 percent for some time.

However, according to Shashi Ullal, who chairs the convergence committee of ASSOCHAM, the real roadblock to funds inflow is not so much the 49 percent ceiling but bureaucracy and corruption within the government. "It is these that are putting the breaks," he told Convergence Plus.

Ullal said 100 percent FDI already existed in sectors like power, but that did not bring in the money despite several steps like putting power sector reforms, placing power projects on the fast track, etc. The largest power project with FDI, the 2,000MW Dhabol plant lies shut and other power projects with foreign investment have not taken off the ground. India became an attractive destination for many foreign investors in telecom in the mid nineties and major operators such as AT&T, US West, BT, France Telecom, First Pacific Canada, Telstra, etc. rushed in, only to beat back hastily as the wrangle over licensing terms got into a circle. Of these, only AT&T remains in the field.

The government's working group on telecom for the 10th five-year plan had estimated foreign fund inflow needed for the telecom sector in 2002-07 at over Rs 46,000 crores. The total fund requirement is estimated at Rs 35,000 crores annually to reach the teledensity of 7.5 percent by 2005 and 15 percent by 2010. But, so far, only a handful of cellular operators have been able to attract FDI substantially. Top of the line is Bharti, who attracted a billion dollars from SingTel, Warburg Pincus, International Finance Corporation (IFC) and New York Life. The annual FDI flow into India is a mere $2 billion, while it is $45 billion in China which is way ahead of India in terms of its telecom expansion.

Recently, COAI said losses in cellular phone ventures have risen to Rs 7,000 crores on an investment of Rs 25,000 crores. The operators are expecting the gestation period to extend into 2006 or more. Nevertheless, one sector that might benefit substantialy is the direct-to-home (DTH) TV channels. DTH has not begun to operate as the terms offered by the government were unattractive. The ceiling of foreign funds into DTH companies was restricted to 20 per cent, but the N.K. Singh Committee has raised this to 49 percent. This is exactly what STAR TV owned by Rupert Murdoch has been demanding -- raising this bar to 49 percent -- as a DTH platform would cost a huge sum -- between Rs 1,500 and Rs 2,000 crores.

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