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FDI: A step forward - Views on News from Equitymaster
 
 
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  • May 10, 2001

    FDI: A step forward

    The government’s disinvestment programme has been languishing in the current year due to various structural constraints. Prominent amongst them is the cap on Foreign Direct Investment (FDI). Yesterday, the union cabinet ministry has increased the FDI limit on various sectors that includes defence, telecom, pharmaceuticals and infrastructure sectors.

    This is seen as a move in the right direction. This is because India managed to attract FDIs worth just US$ 3 bn last year against US$ 30 bn that China manages to receive every year. FDI inflow will help meet the large investment needs of the Indian economy. Apart from this, easing of the limit will benefit the government on the disinvestment front as well.

    For instance, FDI limit has been raised for telecom companies to 74% from the existing 49%. This is however only applicable for Internet Service Providers (ISPs) with gateways, radio paging and end-to-end bandwidth services. VSNL, for which the government has set a target to disinvest by December 2001, has reportedly received the letter of intent from six players, out of which five are domestic telecom companies (the only exception being Bharti-Singtel consortium). Given the lucrative Indian market, why are foreign majors not showing a keen interest in one of the largest service providers in the country?

    VSNL’s disinvestment has been under controversy due to the 49% FDI cap limit. Since the Global Depository Receipt (GDR) holders already have 30% stake in the company, an international bidder cannot hold more than 18% stake in the company. With the company disinvesting 25% stake, these international players will have to necessarily bid along with an Indian partner. Also there are other reasons like the multinational companies already having invested billions of dollars in 3G licenses, leaving little free cash flow for such investment.

    Since VSNL is also an ISP provider with more than 5 gateways, it remains to be seen whether the company falls under this category or not.

    To sum it up, the government has targeted fiscal deficit of 4.7% of Gross Domestic Product (GDP) for FY02. One of the critical components, which can seriously alter the fiscal estimates, is the disinvestment target of Rs 10 bn. To put things in perspective, if the government fails to achieve the disinvestment target, fiscal deficit will go up by 0.5%.

     

     

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