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 I campaigned against the Note; it was finally withdrawn in 2005.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.