Article at Commodity Online (http://www.commodityonline.com/) on July 18, 2013

 

By Rakesh Neelakandan
The day POSCO decided that it would exit the $5 billion Karnataka steel mill project was the day when India’s Finance Minister decided to give a red carpet welcome to 100% FDI in telecom. The fade-in, fade-out effect was almost simultaneous and a bit hazy that one could not decide whether to cry or to laugh or for that matter, do both at the same time.

“I have read somewhere that, in order to open a supermarket in India, one has to secure at least 39 licenses. Now, if you want a beverage shop attached to it, you would have to secure some 10 additional licenses,” said Dhanuraj, Managing Director of Center for Public Policy Research, Kochi.

“Now, who would take this kind of strain? Who would want to come here with their hard earned money and invest in something so complex and complicated?,” he asked.

The case of FDI in retail is a point.

India eventually allowed for 51% of FDI in multi-brand retail after much tinkering marked by debate and discussions. But the riders, instead of they being stepping stones turned out to become stumbling blocks. The result is that except for a single company, no other firms dared to tread on the red carpet, lest the colour faded.

Pressure tactics?

Martin Patrick, an economist from South India believes that India does lack clarity on resource sector policies. The companies that want to invest here may find it daunting.

But it could also be that the companies who have dipped the toes here in Indian waters are carrying out some pressure tactics as well.

“Given the populist nature of things and the hype related to FDI, companies may indulge in these kind of tactics,” Martin noted. It would be a blotch on the image of government if a much hyped-about project does not reach logical conclusion. The companies know this and may want to exploit it.

While this could be a fact, the lack of clarity on resource-sector policies are acting as FDI inflow deterrents.

Raw-commodity policy

POSCO decided to exit the Karnataka steel project citing land acquisition issues. Arcelor Mittal exited the Rs.40,000 cr Odisha project citing land acquisition issues and lack of assurance on captive iron ore security.

“The government has simply ignored the supply economics,” noted Kishore Ostwal,Managing Director, CNI Research.

“The core reason is that India lacks a policy frame work— raw-commodity policy. Take the case of pending mining bill or for that matter the case of coal sector issues…in each case we see a lack of clarity subverting the initiatives,” pointed out Rakesh Arora, expert on metals and mining from Macquarie India.

Add to these, the case of innumerable scams and allegations, the picture becomes murky.

“See, the India government on behalf of the people owns the sovereign right to resources and their exploitation. The question is whom to allocate the resources and at what price,”said Tirthankar Patnaik, economist with Religare.

The latter is a bone of contention and could be the source of trouble, in fact the sole source of trouble. “Note the case of natural gas pricing,” he said.

He believes that the India does not form a grave yard of FDI MoUs and the issues in the area are of transient nature.

Overhaul government systems

Experts argue that we require complete overhaul of government systems to ultimately address the issues.

“What we need is a complete overhaul of government system. Currently, we have complex and complicated systems in the executive. Here one bureaucrat does not talk to the other, minister of one party does not see eye-to-eye with other; this is when they are supposed to work together on important projects and matters related to clearances and all,” Dhanuraj said.

“This also makes the system opaque and foment corruption,” he added.

Will bringing in a commodity regulator change the system?

“It would be a step in the right direction, but will not be effective in addressing the issues of governance,” Dhanuraj said.

That may require a change in political will to create seamless and well oiled systems.

After all, to who else would this regulator report to but government? Where else does this regulator come from, but the government machinery? (rakesh@commodityonline.com)