Sunday, December 6, 2015

PERNICIOUS PRESS NOTE 18

From Business World of 16 October 2004. Press Note 18 was a decision of the department of industrial policy and promotion taken in 1998; it gave the Indian partners in joint ventures a veto on their foreign partner getting into a joint venture with any other Indian. Apart from reducing domestic competition, the Press Note reduced technology flows into India. I campaigned against the Note; it was finally withdrawn in 2005.


Against national interest


The Committee of Secretaries met on October 7 and took a decision on Press Note 18: it decided not to decide. The indecision was a foregone conclusion. For the Communist Party (Marxist) had come out in favour of retaining the Note; the bureaucrats were not going to take a position on an issue that had become political. For the sad fact is that the bureaucracy has been assiduously politicized in recent years. Senior bureaucrats have been chosen for their sympathy with or subservience to the ruling party’s interests, and given to understand that insufficient sympathy would have unpleasant consequences. The Prime Minister has tried since he took over to overturn this legacy and restore to the bureaucracy its basic function, which is to decide without fear or favour. But fear, once it sets in, is difficult to remove. So for better or worse, the Prime Minister will have to decide on Press Note 18.
The Note is a product of lobby politics. Under the reforms of 1991 of which Manmohan Singh was the chief architect, the Congress government removed controls on import of technology, threw open many industries to the entry of fully owned foreign subsidiaries, and removed the approval requirement for foreign direct investment as long as it was within policy parameters. It thus removed the need for forced marriages amongst Indian and foreign enterprises that earlier policies had made imposed. It was common earlier for Indian industrialists to keep a watch on new products whose imports were growing. When he found one, an industrialist would tell the government he was going to produce it and get its imports banned. He would then go and tell the erstwhile exporter to India, “You cannot export your product to India any more. But you would still get a modest profit if you would collaborate with me in its production.” This game of pointless import substitution was ended by the Congress government under the reforms of which Manmohan Singh was the chief architect.
The government that followed was close to old business houses. So early on, when they asked it to give them a veto over fresh investments by their erstwhile foreign collaborators, it readily obliged with Press Note No 18 of December 14, 1998. It closed the “automatic route” for investment to those foreign companies that had ever sold technology to or been in a joint venture with an Indian enterprise. Such companies had to go and get the approval of their Indian counterparties – even if the relationship between the two had long gone cold.
In the 35 years of technology import controls, at least 100,000 collaboration and joint venture agreements were entered into by at least 25,000 Indian firms. Those firms got a veto on fresh investment or technology sales by their erstwhile partners; those partners included at least fifty of the world’s leading industrial firms. Some of the Indian companies would sell a green signal for a price; some cussed or discontented ones would not give it at all. A certain business house is known to have made a lucrative business from the sale of no-objection certificates; it is asking for $50 million for one right now. The veto works to the disadvantage of old foreign firms against new ones – and of new Indian firms against old ones. But it works in favour of government enterprises which imported copious technology – and where left trade unions are well entrenched.
Despite the last government’s eagerness to attract it, foreign direct investment never rose over $4 billion in any year under it. The veto it had thoughtlessly given Indian firms over foreign investment was largely responsible. Business relationships are dynamic; markets, industries, personalities change, and relationships become dysfunctional and reshaped. They should be allowed to die their natural death – so that new relationships can come up. If an Indian company wants control over its foreign partner’s other ventures in India, it can always get it written into its agreement with him; most post-1998 agreements invariably deal with this issue explicitly. When this civil remedy is available, the government has no role to play, and no business to extend it to an absurd limit.

The Prime Minister has just been breaking bread with big financiers and industrialists in New York, and telling them to come and invest in India. He has, unusually for him, taken issue with his leftist allies over foreign investment. He now has a chance to show that he means what he says. He should scrap the Press Note 18 – not just to be fair to foreign investors, but to help new Indian workers and entrepreneurs. For every foreign company that comes to India will employ Indians and buy from Indian vendors. They are politically unrepresented, but they deserve justice no less than others.