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Policy framework for multinational, corporations in India-a historical, perspective.
Subject:
Labor law (Political aspects)
Corporations (Taxation)
Corporations (Political aspects)
International business enterprises (Economic aspects)
International business enterprises (Taxation)
Authors:
Dusanjh, Harpreet
Sidhu, A. S.
Pub Date:
09/01/2010
Publication:
Name: Indian Journal of Economics and Business Publisher: Indian Journal of Economics and Business Audience: Academic Format: Magazine/Journal Subject: Business; Economics Copyright: COPYRIGHT 2010 Indian Journal of Economics and Business ISSN: 0972-5784
Issue:
Date: Sept, 2010 Source Volume: 9 Source Issue: 3
Topic:
Event Code: 920 Taxes Canadian Subject Form: Labour law
Product:
Product Code: 9920000 Multinational Corporations
Geographic:
Geographic Scope: India Geographic Code: 9INDI India

Accession Number:
237941302
Full Text:
Abstract

In the present times, no economy can escape the wave of globalization. As far as India's story is concerned, though it is one of the most attractive destinations of the world today (World Investment Report, 2008 and Ernst and Young, 2008), yet the origin of mncs is not new rather a three centuries old phenomenon. In view of that, the policy makers have been following different policies as required with the changing times. The present paper is an attempt to analyze policy framework concerning multinational corporations in India. The findings reveal that MNC investors are finding some hindrances and lags in the present policy framework and thereby suggest some measures to make this [policy environment investor friendly, thereby proving to be a boon for both India as well as these MNC investors.

I. INTRODUCTION

The existence of Multinational Corporations (MNCs) in India is not a recent phenomenon (Belhoste and Grasset, 2008) rather such subsistence is approximately three centuries old. As such, the historical background of MNCs in India can be traced back to as early as 1600s whereby the British capital came to dominate the Indian scene through their Multinational Corporation known as East India Company in the colonial era. However, demarcation of the clear boundary lines of this history is hampered by the lack of abundant and authentic data. Moreover, such outlining is also obstructed by the discontinuity in the nature of the data relating to these MNCs. Furthermore, the data available with regard to such FDI in one secondary source do not match with that of another source (Nayak, 2006). As a result of this, researchers could not portray the complete history of Multinational Corporations and FDI pouring in India even during the post independence era. The present paper is an attempt to fill this gap and resultant policy framework to regulate these multinational corporations from time to time.

SECTION II

II. OBJECTIVES AND RESEARCH METHODOLOGY

The present paper attempts to trace out the historical background of MNCs in India and to critically evaluate the effectiveness of existing policy framework in order to contribute in a constructive manner towards policy development in future by highlighting the hindrances faced by foreign investors in present policy regime. The rationale of the paper arises from the fact that only few studies have been conducted in this area and that too deal with the subject indirectly. Therefore, the present study is an attempt to fill up this gap. For the purpose of this study,--the Multinational Corporations (MNCs) are defined as all foreign multinational corporations existing in India as per the definition given by RBI and IMF (1).

The paper has been divided into six sections. Section I introduces the paper. Section II discusses the objectives and the methodology of the paper. Section III appraises the historical background and policy of the government towards foreign multinational corporations in the pre as well as post independence era. Section IV of the paper discusses the present legal and regulatory status for the entry of the MNCs in India. Section V of the paper undertakes critical analysis of the policy framework by keeping in view the difficulties of the MNCs into account. Section VI concludes the paper along with suitable recommendations and suggestions.

As far as methodological part of this study is concerned, the study is based on secondary data sources. Existing literature, reports and consultation papers of government of India, reserve bank of India and other reports have been consulted to attain the objectives of the study.

SECTION III

III. INDIAN POLICY FRAMEWORK CONCERNING MNCS DURING PRE AND POST INDEPENDENCE ERA

To discuss the historical background and policy framework for the MNCs, the analsysis has been divided into two periods i.e. pre and post independence era:

(a) Pre Independence Era Policy

According to Nayak (2006), the period from 1900s-1918 can be called as the first phase of FDI in India when there were no restrictions on the nature as well as type of FDI pouring into India. Majority of these investments at those times were exploitative in nature and were just concentrating in the sectors such as mining and extractive industries to suit the general British economic interest. It is a noticeable fact that even in the post independence era, a major pie of the FDI source of India continued to come from the same source. It is interesting to note that despite of allowance of this free flow of FDI, no other country was interested in investing in India other than U.K. and all FDI coming to India during that period were sourced through the Managing Agents from U.K.

However, the period from 1919-1947 is considered to be more important when the FDI actually originated in India. This phase can be called as second phase of pre-independence FDI history in India. Import duties were introduced during this period to stimulate various British companies to invest in the" manufacturing sector in order to protect their businesses in India. Though some Japanese companies also enhanced their trade share with India, yet U.K. maintained its position as most dominant investor in India during this period.

(b) Post Independence Era Policy

Before if dependence, Indian government was quite comfortable with the "laissez faire" policy adopted by British government earlier; therefore, India was not having its own foreign policy. However, after independence, various issues relating to foreign capital and its accompanying expertise sought attention of the policy makers. Therefore, the government of India had to allow the operations of the MNCs on such terms that best suited to national interests during post-independence era. The following were the major objectives of policy concerning FDI:

(i) to treat foreign direct investment as a medium to acquire modern advanced technology; and

(ii) to mobilize resources, especially in terms of foreign exchange.

With the changing times, the policy of Indian governments kept on changing as per economic and political exigencies prevailing at those times. Accordingly, it can be spilt into four phases (Kumar, 1998 and Chopra, 2003). Whereas in 1960s, these policies were quite liberal, yet these became very stringent in 1970s. However, these were again liberalized in 1980s and real liberalization occurred in 1990s. The main four phases for" Indian policy framework concerning MNCs can be classified hereunder:

Phase I--1948-1966: The Period of "Cautious Welcome Policy"

Re first and unique foreign policy of India to deal with incoming FDI was pronounced by the then Prime Minister Pandit Jawahar Lal Nehru at the very dawn of independence as on 6th April, 1947 (Mathur, 1992). Despite of many critics of his world wide view, a wide national consensus had emerged for his ideas on independent foreign policy of independent India (Mohan, 2006). Nehru statement in parliament considered foreign investment as "necessary" not only to supplement domestic capital but also to secure scientific, technical and industrial knowledge and capital equipment (Kidron, 1965).

Therefore, following mutually advantageous promises were made to the MNCs:

* All undertakings, whether Indian or foreign will have to conform with the general requirements of the government's overall industrial policy;

* No discrimination would be made by Indian policy makers between the foreign and the domestic undertakings;

* As far as remittances of profits and repatriation of capital was concerned, reasonable facilities would be granted to foreign investors as permitted by foreign exchange position at prevailing time;

* In case a particular industry has to be nationalized; a fair and equitable compensation would be granted to the foreign investors having a stake in that undertaking; and

* By rule, major interest, ownership and effective control of the undertaking should be in Indian hands (Indian Investment Centre, 1985).

After carrying out industrialization in India to a satisfactory extent, new industrial policy resolution of April, 1956 made various private domestic as well as foreign companies a part of India's public sector. As a result of new policy, MNCs had to venture through technical collaborations during that period in India. However, during the tenure of second five year plan (1956-61), government faced twos severe crisis in the form of foreign exchange and financial resource mobilization. To deal with this crisis, government liberalized its attitude towards MNCs and foreign investment in two ways:

(i) A more frequent equity participation was allowed to foreign enterprises; and

(ii) In lieu of royalties and fees, equity capital was accepted in technical collaborations.

Further, a number of other incentives such as tax concessions, simplification of licensing procedures, double taxation avoidance agreements with certain countries and extension of agency for international development (AID) Investment guarantee to cover US private investment in India were also given to lure foreign companies (Kumar, 1998 and Chopra, 2003). This led to "ambitious" investments by many companies from countries such as UK and USA (Nayak, 2006).

In order to further combat foreign exchange crisis, government further de-reserved some industries such as drugs, aluminum, heavy electrical equipment, fertilizers, synthetic rubber etc. in 1961 (Mathur, 1992; Kumar, 1998 and Chopra, 2003). Further, the Finance Act of 1965 also made provision for certain additional tax concessions.

Phase II--1967-1979: The Period of "Selective and Restrictive Policy"

The liberal attitude adopted in second five year plan had to be changed in the early seventies due to significant outflow of foreign exchange in the form of remittances of dividends, profits, royalties and technical less in this period. Therefore, to put an end to this phenomenon, policy of government became highly restrictive as far as foreign exchange, type of FDI and ownership of foreign companies was concerned. Government also set up a new agency called "foreign investment board" and classified industries in order to regulate flow of foreign capital in these sectors.

A new regulation called Foreign Exchange Regulation Act (FERA) was also enacted in order to tighten the scope of FDI regime in India. With the operation of FERA, all existing companies came under the direct control of reserve bank of India. FERA resulted in dilution of share of large number of companies as nearly 84 companies are reported to divest fro India during that period (Nayak, 2006).

In order to review the extent of technology brought in by these MNCs, a committee called "technical evaluation committee" was formed and foreign investment proposals were now discussed with the council of scientific and industrial research (CSIR) and department of science and technology (DST). It was also specified to assign primary role to Indian consultant in case of engagement of a foreign consultant.

Phase III--1980-1990: The Period of "Partial Liberalization"

In this phase, a new direction was given to the history of FDI in India, especially in the mid-eighties. This happened due to two reasons i.e. Second oil crisis and Failure of India to give boost to its manufactured exports. As a result of this development, the balance of payment position situation was further deteriorated. Therefore, a number of policy measures were taken by the government to encourage and maintain operations of Multinational Corporations in India. The main highlights of the policy of government of India during this period were:

* Firstly, liberalization of imports of capital goods and technology in order to stress the modernization of the plants and equipments;

* Second, gradual reduction in import restrictions and tariffs in order to expose the Indian economy to competition; and

* Thirdly, to assign an .important role to multinational corporations for promotion of export of manufactured goods on a big scale.

The Reserve Bank of India also simplified procedural formalities relating to exchange control. Further, the list of items under Open General License (OGL) was also expanded for allowing imports of raw materials and capital goods. In 1986, the tax rates on royalties were also reduced from 40 to 30 per cent. The scope of the technical development fund was also widened to include import of all kinds of capital equipments, technical know-how and assistance, drawings and design and consultancy services. Moreover, the ceiling of this fund was raised to a foreign exchange up to Rs. 20 million per year. The process of industrial policy reforms aimed at fostering greater competition, efficiency and growth in the industry through a stable, pragmatic and non-discriminatory policy for foreign direct investment. Although, the amount of FDI augmented by over 13 times during this period, foreign companies invested 'cautiously' during this period with an attitude of wait and watch (Nayak, 2006).

Phase IV--1991-2001: The Period of "Liberalization and Open Door Policy"

In the early nineties, the balance of payments problem of India had turned quite severe. Along with, a rapid increase in India's external debt and increasing political uncertainty made international credit rating agencies to lower both short and long term borrowing rating of India. Therefore, the new government headed by Mr. P. V. Narasimha Rao initiated a programme of macro-economic stabilization and structural adjustment programme at the behest of IMF and World Bank. This resulted into liberalization of Economic policies in order to encourage investment and accelerate economic growth (Beena et al., 2004).

The scenario relating to foreign direct investment in India could also not remain unaltered by these new policy developments as in order to stabilize India's external sector and to review the declining credit rating of the country, the government gave a second thought to the foreign investment policy of India.

A Foreign Investment Promotion Board (FIPB) was authorized to provide a single window clearance system in the Prime Minister's office in order to invite and facilitate MNC investment in India. For the purpose of expansion in the priority industries, the existing companies were also allowed to raise their foreign equity levels up to 51 per cent. The use of foreign brand names for products manufactured in domestic industry (which was earlier restricted) was also liberalized. India also became a signatory to the Convention of the Multilateral Investment Guarantee Agency (MIGA) for protection of foreign investments.

The Foreign Exchange Regulation Act (FERA), 1973 was revised and earlier restrictions placed on MNCs in FERA were lifted. Moreover, the companies having more than 40 per cent of foreign equity were treated on par with fully Indian-owned companies. New sectors such as mining, banking, telecommunications, highways construction and management were thrown open to private as wen as foreign owned companies. Further, the international trade policy regime was also considerably liberalized with lower tariffs on various importable goods and negative list for imports was also sharp pruned. Furthermore, the Rupee was also made convertible first on trade account and finally on current account partially.

SECTION IV

IV. POLICY DEALING WITH ENTRY OPTIONS FOR MNCS IN INDIA A foreign multinational corporation planning to set up its business operations in India can enter through the following modes:

* As an Incorporated Entity: to become an incorporated entity, a MNC can opt for becoming an incorporated entity under Companies Act, 1956 through:

(i) Joint ventures; or

(ii) A wholly owned subsidiaries.

Depending on the requirements of the investor and subject to any equity caps prescribed in respect of the area of activities under the Foreign Direct Investment (FDI) policy, foreign equity in such companies can be up to 100% of the total equity.

* As an Unincorporated Entity: alternatively, any foreign multinational company can enter into business operations in India by opening a:

(i) Liaison Office/Representative Office;

(ii) Project Office; or

(iii) Branch Office.

Such offices of multinational corporations can undertake activities permitted under the Foreign Exchange Management Regulations, 2000.

V. INVESTMENT ROUTES OF FOREIGN MULTINATIONAL CORPORATION IN INDIA

(a) Automatic approval--by the Country's Central bank i.e. the Reserve Bank of India; or

(b) Through the Foreign Investment Promotion Board (FIPB).

Automatic approval of Reserve Bank of India can be availed if the FDI in the equity of company does not exceed:

* 50 per cent in the industries given in Annexure III A of the new industrial policy;

* 51 per cent in the industries given in Annexure III B of the new industrial policy;

* 74 per cent in the industries given in Annexure III C of the new industrial policy; and

* 100 per cent in the industries given in Annexure III D of the new industrial policy.

In the above cases, the intending company is required only to report to Reserve Bank of India within 30 days of the receipt of foreign equity/allotment of the shares. For other proposals that fail to qualify automatic approval criteria, approval of FIPB is required (Reserve Bank of India, Department of Industrial Policy & Promotion, IBEF, 2008). The sector wise detail of the permitted foreign equity limit is given in table I.

VI. LEGAL POLICY FRAMEWORK GOVERNING FOREIGN CAPITAL IN INDIA

The policy framework in India has been almost same for Indian as well as foreign private investment. As the motive to regulate FDI since post independence era was to ensure majority control to remain in Indian hands to the extent possible, therefore several legal rules and regulations were implemented as a part of policy framework at that time that discouraged foreign ownership in most industries for many years. Starting from Industrial Policy Regulation, 1948, this framework further included Industrial (Development and Regulation) Act, 1951 (IDRA), the features of which had their roots lying in the Second World War period. Similarly, Monopolies and Restrictive Trade Practices Act, 1969 (MRTP) was required to be adopted due to the Directive Principles of State Policy as enshrined in the Constitution of India. In addition, to give a boost to the principle of self-reliance, conservation of the limited foreign exchange resources, rational utilization of the same and to curb external liabilities for the coming generations, the Foreign Exchange Regulation Act (FERA) was also adopted in 1973. All these acts produced an array of rules and administrative norms that in turn led to creation of a wide and complex system of controls and procedures involving extensive delays and uncertainties in new investments. The key policy measures adopted over the years are summarized in Table II.

SECTION V

VII. CRITICAL ANALYSIS OF EXISTING POLICY FRAMEWORK CONCERNING MNCS

Although the early nineties free market reforms initiated were meant to spur the growth of foreign investment in India, yet the objectives have not been fully realized due to some hurdles in the way. Mr Amrit Kiran Singh, Chairman of The American Chamber of Commerce in India (AMCHAM), while submitting a compendium of position papers on key industries to the Ministries concerned pointed out "poor infrastructure, belligerent tax administration, fragmented markets, and pragmatic labour laws" as hurdles to FDI. Mr Singh opined that if these issues are resolved, multinational companies present in India and those in waiting would surely expand operations. Therefore, based on the analysis of above policy frameworks from time to time and keeping in mind the view of various renowned scholars and experts as well as potential investors, it is suggested to undertake a critical evaluation of existing impediments and remove these in order to pave the way for the further development through the mutually advantageous existence of Multinational Corporations in the country. These are:

1. Levels of Bureaucracy: Central versus State

It has been observed that sometimes the rules of centre and state are in conflict with each other that lead to creation of a confusion among the foreign investors. For example, from June 2007, in liquor business, all foreign direct investments (FDI) have been allowed by Union government through the "automatic" route by abolition of the licenses earlier required for most manufacturing businesses in the 1980s. However, in spite of this change in policy measure, FDI failed to move in this sector. This happened due to continuance of the prevailing "state" laws as these laws continued to require licensing as well as levying of a tax in the form of excise duty. Therefore, foreign multinational corporations are still preferring to enter into this business through joint ventures, partnerships, manufacturing alliances, taking leases from domestic companies, operating through "work contracts" or by acquiring domestic companies already having licenses rather than acquiring licenses from government. This was so because, these firms found the state laws to be time consuming, cumbersome and also lacking inter-state uniformity. Therefore, majority of these companies did not find any sense of the privileges granted in the form of automatic route of investment provided by the union government. This hurdle has also attracted the attention of Federation of Indian Chamber of Commerce and Industries (FICCI) (Business Line, 2002). Not only this, but some states are also charging hefty Amounts for such licenses e.g. Andhra Pradesh is charging highest license fee of 2.5 Crore rupees at present. Therefore, without the coordination of "Union-State" policies, manufacturing companies will still hesitate to invest in India in spite of its liberalized regime.

2. Exorbitantly High Tax Rate Structures

India has one of the highest corporate tax rate structures as compared to other countries in the Asia-pacific region (KPMG, 2007 and ENS Economic Bureau, 2007). India's tax rates are not only higher as compared to countries in the Asia-pacific region (see table III), but also as compared to other nations and economies of the World. In a review of corporate tax rates at the beginning of 2007 in 92 countries, the average tax rate in the EU was found to be 24.2%, compared with 27.8% in the OECD countries and 28% in Latin America, whereas India's tax rate is still hovering around an exorbitantly high of above 40 per cent (KPMG, 2007).

If compared to the policy structure relating to taxation of one of its closest competitors i.e. China, India lags behind in various policy measures such as:

* "Two plus Three" tax holiday for Manufacturing Foreign Investment Enterprises ("FIEs") which implies that a Tax holiday for all manufacturing FIEs starting with an initial two-year exemption followed by 50 per cent reduction in tax rate for three years, beginning from the first profitable year aider adjusting for tax losses;

* Attractive tax rate of 15 per cent tax rate in Special Economic Zones; 24 per cent tax rate in certain coastal cities;

* Foreign investor reinvesting its share of profits for at least five years to get a 40 per cent refund of tax paid on sum reinvested (such refund may be granted up to 100 per cent if such reinvestment is made in advanced technology industries or export oriented enterprises);

* For high tech FIEs, a three-year tax holiday extension is applicable. In addition, these High Tech FIEs will be taxed at a "reduced" rate of 15 per cent to 20 per cent;

* Extended 50 per cent tax rate reduction for export oriented FIEs;

* Preferential tax rates of 15 per cent and 24 per cent if investment is made in "certain" regions; and

* Dividends repatriated to foreign investors by FIEs with at least 25 per cent registered capital held by foreign shareholders are exempted. However, these dividends are subject to tax in Indian case.

It implies that India direly needs to review its policy concerning taxes at an immediate instance and by following Kelkar Committee recommendations, India should bring, down its tax rates to compete with other nations attracting FDI in the priority sectors. Efforts should be made to amend the tax laws by incorporating new provisions such as reduced tax rates on profits, tax holidays, accounting rules allowing for accelerated depreciation and loss carry forwards for tax purposes and reduced tariffs on imported equipments and raw materials etc.

3. Lack of Developed Infrastructure

Extensive and efficient infrastructure is an essential driver of competitiveness. It is critical for ensuring the effective functioning of the economy, as it is an important factor determining the location of economic activity and the kinds of activities or sectors that can develop in a particular economy (Global Competitiveness Report, 2008). However, as far as India is concerned, existence of the state-controlled physical infrastructure is often considered as the weakest link as well as major impediment to MNCs entry, (Sheel, 2001) especially in the manufacturing sector. In a survey conducted by FICCI, roughly 43 per cent of the respondents regarded India's ports and airport facilities as substandard as compared to international standards. In addition, investors also remained concerned with the lack of improvement in other infrastructural facilities such as transport, roads, power and water availability also. However, infrastructural factor is an important decider in choice of MNCs for starting their operations at state level (Badle, 1998). States such as Gujarat, Maharashtra, Karnataka, Tamil Naidu and Andhra Pradesh etc. are receiving a major pie in the share of FDI (Department of Industrial Policy & Promotion, 2008) as compared to other states that lag behind in infrastructural facilities. Therefore, policy relating to infrastructure definitely requires an immediate attention of the policy makers.

4. Corruption

Kumar (2000) observes that a combination of legal hurdles, lack of institutional reforms, bureaucratic decision-making and the allegations of corruption at the top level have dragged foreign investors away from India.

Treadgold (1998) also states, foreign investors find it difficult to cut a path through the paper work of overlapping government agencies. The humongous bureaucratic structure has created a fertile ground for corruption. Moreover, most foreign investors have become apprehensive of the country's past record of discrimination against foreign multinational companies and India's prior reputation of a slow, difficult, bureaucracy ridden environment to do business (Teisch and Stoever, 1999). This is evidenced by the facts of Transparency International, a global civil society organization which ranked India at a far away position as compared to other Asia-Pacific countries (see table IV) in the perception of corruption scenario by the potential investors looking for a destination to invest.

5. Political Instability

The foreign investors perceive Indian political environment to be inharmonious and peevish for creating an amicable atmosphere for foreign investment (Kapur and Ramamurti, 2001). Foreign investors hesitate to invest in India due to the political instability that in turn results in to instable policies coming in frequently and without expectations. Not only this, the multiplicity of regional political parties results into a clears majority at the centre level forming shaky and insecure coalition governments. For example, there were four general elections and six prime ministers during a short span of time. In such an environment, the much required economic reforms turn out to be sluggish as well as inadequate. Instead of opting for a clear and unshaken attitude towards reforms easing foreign investment, governments are repeatedly concerned with diluting the reforms in order to keep their coalition partners on board (Kripalani, 1999).

6. Inflexible Labour Laws

Global Competitive Report, 2008-09 ranked India much behind (see table V) in terms of labor market flexibility. The causes of such inflexibility are rooted in the laws and regulations prevailing in India. Labor laws are considerably stringent in India as compared to other countries, MNC employers are generally discouraged to give a boost to labor hiring due to the inflexibility brought out by Indian laws and regulations during cyclical downturns. As a result, these companies are abandoned from closing down their inefficient and unprofitable businesses.

Srinivasan (2000) views that some of the Indian labor laws are perceived to be extremely outdated, rigid and inadequate particularly Contract Labour (Regulation & Abolition) Act, 1948; Industrial Disputes Act, 1947; Minimum Wages Act, 1948; Workmen's Compensation Act, 1923; Employees' Provident Funds and Miscellaneous Provisions Act, 1952; ESI Act, 1948 and Factories Act, 1948. The main problems identified in these acts include cumbersome exit procedures, maintenance of on site records and myriad inspections etc. Ramamurthi (2000) considers one of the biggest impediments to privatization in India to be lack of an exit policy i.e. a policy to govern the dismissal of redundant workers. The present Indian labor laws forbid layoffs of workers for any reason (Kripalani, 1998). These laws protect the workers and put a stop to any legitimate attempts to restructure business. Further, to retrench unnecessary workers, firms require approval from both employees and state governments-approval that is rarely given (Kripalani, 2000).

7. Government Ceiling on Foreign Ownership

United States companies represented by American Chamber of Commerce (AmCham) have cited ceiling on foreign ownership by the policy makers as the major backdrop of Indian policy. As per AmCham, due to the barriers to FDI, India is able to attract only $5 billion from the Untied States, whereas at the same tine China grabs about $60 billion (Business Line, 2006). These companies wish that the policy makers should remove the limit on foreign ownership that effectively prevents foreign control of Indian businesses (Piggott, 2003).

8. The Excessively Rigid Role of RBI

The foreign investors blame Reserve Bank of India (RBI) for the slower inflow of FDI in India due to various reasons such as (i) excessive rigidity in granting permissions; (ii) delay in allowing authorization for outward remittances; and (iii) problems with downstream investment facility under automatic route (Srinivasan, 2000).

SECTION VI

VII. CONCLUSION AND SUGGESTIONS

The foregoing analysis leads to the conclusion that much remains to be implemented in order to improve the consistency in policy making and executing, improving quality of governance and overall regulatory framework as well. This is particularly imperative in the case of foreign investments coming in sectors such as infrastructure that are evidently critical for overall growth and development of India in the years to come. However, in spite of this, the policy makers need to deal fairly with the decision to open up various sectors for MNCs in India. The following suggestions could be a considered by the policy makers for future framework of policy in order to incorporate measures to overcome hurdles faced by multinational corporations:

* The industrial policy statement of 1990 needs further changes with regard to foreign investment and technology. It fails to understand the likely impact of foreign investment on balance of payments, self-reliance, indigenous R&D, employment and India's stand on MNCs etc. Therefore, it is recommended that clear guidelines should be laid down on such issues of national importance.

* The rationale for various countries to restrict FDI is to avoid the risk of foreign multinational corporations to out-compete the domestic corporations and enterprises. However, government should undertake a careful sectoral analysis for identification of the sectors where domestic players are unable to furnish the needs of growing domestic as well as export demand for goods and services or these do not inhibit the necessary ability or capacity to provide the required quality standards. This will not only result into bringing the investment into those sectors but also arousal of the sense of competition and generation of spillovers (8) to the domestic players that will ultimately lead to benefiting the domestic economy to grow in the long run.

* As policy makers are interested in development of infrastructure for both domestic and foreign interests, therefore, consideration should be given for the involvement of foreign players in creation of these facilities. Even state governments are ready to welcoming infrastructural projects such as roads, rural electrification, and power generation and transmission (Pathak et al., 2000). However, care must be taken to deal with the entry and extent of investment by MNCs in certain complex sectors in order to prevent monopolies in public utilities to foreign firms. Liberalization of Indian economy needs to be a very cautious and balanced liberalization instead of a "rushed liberalization".

* As it is difficult to assess the impact of liberalization in a particular industry employing a large number of unskilled people, therefore, in such cases, it becomes imperative to carry out an in-depth securitization of policy prior to take a decision on allowing the multinational corporations in such sectors.

* The policy statement must be more analytical of foreign investment as if MNCs are given an entry in a rushed manner as a key to the problems such as foreign exchange, inflation, unemployment, then the policy makers need to act in a very cautious manner. This is so because, the prime motive of any multinational, be it Indian or foreign is always profit not society.

* Policy efforts may be made to invite MNCs in the sectors where India wishes to augment its exports. This is because, this objective will be mutually advantageous to Indian economy as well as MNCs. Export objective is commensurate with the MNC objective of profit-maximization. At the same time, exports will result into generation of foreign exchange. This foreign exchange can be further utilized to import capital equipments for growth and development of other sectors.

* Policy efforts must be directed to encourage MNCs to invest in agricultural sector. This is because; majority of Indian population is dependent on agriculture. However, due to lack of investment, productivity in this sector remains to be much low. Encouraging foreign investment in this sector particularly infrastructure will not only give a push to productivity but also lead to creation of employment and development in rural India. Further, if policy efforts are made to set up ties between domestic companies, then it will again lead to spillover benefits to the domestic companies in the long run.

* An attempt must be made to identify sectors where MNC investment will lead to realization of economies of scale which domestic firms are unable to carry out due to lack of capital and technological know-how. This will result in effective capacity utilization of those sectors. This will also lead to reduction in prices of goods for domestic customers and enhancement of quantity of exports due to lower prices.

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HARPREET DUSANJH AND A.S. SIDHU

Guru Nanak Dev University, Punjab, India

Notes

(1.) In India, a foreign controlled company used to be defined as a company in which 25 per cent of the equity was held by a single investor or if 40 per cent of the equity was held in any one of the foreign country. But with effect from the year 1992, Reserve Bank of India has also adopted the criteria followed by IMF i.e. a firm is treated as foreign controlled firm if 10 per cent of its voting stock is held .by a single investor.

(2.) 0% for NT$50,000 or less; 15% for NT$50,001--100,000; 25% for over NT$100,000. An additional 10% on retained earnings kept for more than one year.

(3.) 14.3% for the first 100 million Won of taxable income and 27.5% on taxable income in excess of that (inclusive of the resident tax surcharge of 10%).

(4.) Where taxable income is SLR 5 million or less, 15% rate applies. Corporate tax rate is 33 113% for quoted public company for the first 5 years and 35% for other companies. Lower rate of 15% also applies to companies engaged in non-traditional exports, agricultural undertakings; promotion of tourism, construction works etc.

(5.) For companies with paid-up capital of RM2.5 million or less, 20% on the first RM500,000 of chargeable income and 28% on any balance in excess of RM500,000. For companies with paid-up capital of more than RM2.5 million, rate will be 28%.

(6.) India is criticized by MNCs for making discrimination between domestic companies and MNCs as far as tax policy is concerned as domestic companies in India are taxed at a lower rate of 33.66%.

(7.) Corruption Perception Index ranks countries in the ascending order starting from giving number "1" rank to the "Least Corrupt Country" as perceived by investors.

(8.) MNCs have both direct as well indirect effects on the economy of the host nations. In a direct manner, MNCs influence by providing benefits such as technology transfer, licensing and exporting thus in turn creating employment and transferring R&D. Besides these direct effects, MNCs also exert certain indirect effects on host countries referred to as spillover effects. The term "spillover" has not been defined aptly in the literature anywhere when referred to MNCs except by a few researchers such as Globerman(1979), Blomstrom and Kokko (1993) and Meyer (2003). In their view, spillovers are said to take place when the firm-specific assets of the advantages of the company can not be fully internalized, thus making the uncompensated benefits to leak from these MNCs to domestic companies, customers as well as suppliers in the host nation. In other words, the spillovers exist when "The MNCs cannot reap all the productivity or efficiency benefits that follow in the host country's domestic firms as a result of the entry or presence of MNC affiliates."
Table I
FDI Permitted in Various Sectors/ Activities

Sr. No.   Extent of Allowed FDI   Sectors

I.        Sectors where           i. Retail Trading (except Single
          FDI is Prohibited       Brand  Product Retailing)

                                  ii. Atomic Energy

                                  iii. Lottery Business

                                  iv. Gambling and Betting Sector

II.       Sectors where FDI       i. Broadcasting
          up to 26% allowed
                                  (a) FM Radio--FDI + FII
                                  investment up to 20% with prior
                                  Government approval subject to
                                  guidelines by 'Ministry of
                                  Information & Broadcasting.

                                  (b) Uplinking a news and current
                                  affairs TV Channel -up to 26% (FDI
                                  + FII) with prior FIPB approval.

                                  ii. Print Media

                                  Publishing newspaper and
                                  periodicals dealing with news and
                                  current affairs--FDI up to 26% with
                                  prior Government approval

                                  iii. Defence Industries

                                  FDI up to 26% with prior Government
                                  approval

                                  iv. Insurance

                                  Foreign equity (FDI+FII) up to 2646
                                  under the automatic route

                                  v. Petroleum and Natural Gas Sector

                                  Refining in case of PSUs: up to 26%
                                  with prior FIPB approval.

III.      Sectors where           i. Broadcasting
          FDI up to 49% allowed
                                  a. Setting up hardware facilities
                                  such as up-linking, HUB,
                                  etc.--FDI+FII equity up to 49% with
                                  prior Government approval subject
                                  to up-linking Policy notified by
                                  Ministry of Information &
                                  Broadcasting.

                                  b. Cable network--Foreign equity
                                  (FDI+FII) up to 49% with prior
                                  Government approval subject to
                                  Cable Television Network Rules
                                  (1994) notified by Ministry of
                                  Information & Broadcasting. c.
                                  DTH--Foreign equity (FDI+FII) up to
                                  49% with prior Government approval.
                                  FDI can not exceed 20% subject to
                                  guidelines by Ministry of
                                  Information & Broadcasting.

                                  ii. Domestic Scheduled Passenger
                                  Airline Sector FDI up to 49% under
                                  the automatic route with no direct
                                  or indirect participation of
                                  foreign airlines.

                                  iii. Asset Reconstruction Companies
                                  up to 49% (only FDI) with prior
                                  FIPB approval.

                                  iv. Petroleum refining by PSUs

                                  No divestment of domestic equity in
                                  existing PSUs would be permitted
                                  for increasing the FDI up to 49%.

                                  v. Commodity Exchanges

                                  FDI +FII up to 49% with a sub-
                                  limit for FII at 23% and for FDI at
                                  26%.

                                  vi. Stock Exchanges

                                  FDI +FII up to 49% with a sub-
                                  limit for FII at 23% and for FDI at
                                  26%.

                                  vii. Credit Information Companies-
                                  -FDI +FII up to 49% with

                                  a sub-limit for FII at 24% in the
                                  CICs listed on the Stock Exchanges.

IV.       Sectors where           Single Brand Product Retailing--
          FDI up to 51%           with prior Government approval
          is allowed              subject to:--

                                  a) Products being sold under the
                                  same brand internationally.

                                  b) Products sold being of a single
                                  brand. Retailing of multiple
                                  products sold under different brand
                                  names, even if produced by the same
                                  manufacturer, would not be allowed.

                                  c) Single Brand product retailing
                                  would cover only such products as
                                  are branded at the manufacturing
                                  point.

V.        Sectors where           Telecommunication services: Basic
          FDI up to 74%           and Cellular--FDI up to 74%
          allowed                 allowed.

                                  a) FDI up to 49% is under automatic
                                  route.

                                  b) Beyond 49% and up to 74% requires
                                  FIPB approval.

                                  Foreign equity includes FDI, FII,
                                  NRI, FCCBs, ADRs, GDRs, convertible
                                  preference shares, and
                                  proportionate foreign equity in
                                  Indian promoters/ Investing
                                  Company.

VI.       Sectors where           i. Development of Existing Airports
          FDI up to 100%
          allowed subject         FDI up to 74% under automatic route
          to conditions           and beyond this under FIPB route

                                  ii. Exploration and Mining of Coal
                                  and Lignite for Captive Consumption

                                  FDI up to 100% under automatic
                                  route subject to provisions of Coal
                                  Mines (Nationalization) Act, 1973

                                  iii. Trading

                                  Trading of items sourced from small
                                  scale sector under Govt approval
                                  route

                                  iv. Trading

                                  Test marketing of such items for
                                  which a company has approval for
                                  manufacture under Govt approval
                                  route

                                  v. Courier Services for Carrying
                                  Packages, Parcels and Other Items
                                  which do not come within the ambit
                                  of the Indian Post Office Act, 1898

                                  prior Government approval subject
                                  to existing laws and subject to
                                  existing laws and exclusion of
                                  activity relating to distribution
                                  of letters, which is exclusively
                                  reserved for the State.

                                  vi. Tea Sector, including Tea
                                  Plantation

                                  prior Government approval subject
                                  to divestment of 26% equity within
                                  five years

                                  vii. Non Banking Finance Companies

                                  FDI up to 100% under the automatic
                                  route subject to minimum
                                  capitalization norms

                                  viii. Construction Development
                                  Projects

                                  FDI up to 100% on the automatic
                                  route subject to minimum
                                  capitalization norms; minimum area
                                  development and lock-in on original
                                  investment.

                                  ix. ISP without Gateway,
                                  Infrastructure provider providing
                                  Dark Fibre, Right of Way, Duct
                                  Space, Tower (Category I);
                                  Electronic Mail and Voice Mail

                                  a) FDI up to 49% under automatic
                                  route.

                                  b) Beyond 49% and up to 100%
                                  subject to FIPB approval subject to
                                  divestment of 26% equity in 5 years
                                  if the investing companies are
                                  listed in other parts of the world.

                                  x. Domestic Scheduled/
                                  Non-Scheduled & Chartered Airlines/
                                  Air Transport Services

                                  NRI investment up to 100% permitted
                                  under the automatic route with no
                                  direct or indirect participation of
                                  foreign airlines.

                                  xi. Power Trading

                                  up to 100% subject to compliance
                                  with Regulations under the
                                  Electricity Act, 2003

                                  xii. Cigars & Cigarettes

                                  up to 100% with prior FIPB approval
                                  and Subject to industrial license
                                  under the Industries (Development &
                                  Regulation) Act, 1951.

                                  xiii. Alcohol Distillation and
                                  Brewing

                                  100% FDI under automatic route
                                  subject to license by appropriate
                                  authority.

Source: Department of Industrial Policy & Promotion, Ministry of
Commerce & Industry, Government of India in 'Investing in
India-Foreign Direct Investment--Policy and Procedures'

Table II
Legal Policy Framework Governing Foreign Capital in India

a Companies Act, 1951     Restrictions on the operations of managing
                          agencies that resulted in affecting
                          functioning of various British companies in
                          India.

b. Industries             To regulate the industrial licenses, With
(Development &            progressive liberalization and deregulation
Regulation) Act, 1951.    of the economy the requirement of
                          industrial licensing have been
                          substantially reduced. At present
                          industrial license for manufacturing is
                          required only for the following:

                          i. industries retained under compulsory
                          licensing;

                          ii. manufacture of items reserved for small
                          scale; and

                          iii. when proposed location attracts
                          location restriction.

c. Corporate Tax          Corporate tax rates on foreign companies
policies, 1957 to 1991    were intentionally kept about 15 to 20 per
                          cent higher than the rates charged for
                          large Indian companies for the period 1956
                          to 1991.

d. Monopolies and         All applications for obtaining license for
Restrictive Trade         companies belonging to big business houses
Practices Act, 1969       and subsidiaries of foreign companies had
                          to be referred to 'MRTP Commission', which
                          invited objections and held public hearings
                          before granting a license.

e. Industrial Policy      Hereby, Appendix 1 clearly specified the
Statement, 1973           industries where foreign firms were allowed
                          to operate (generally, these were
                          industries whose products were not produced
                          in India or where the domestic sector was
                          being dominated by a single (usually
                          foreign) company;

f. Foreign Exchange       Hereby, foreign companies operating in
Regulation Act, 1973      India asked to reduce their share of equity
                          capital invested in any Indian company to
                          less than 40 per cent, unless they were
                          engaged in specified 'core' activities
                          (Appendix I, IPS, 1973), and were using
                          sophisticated technology or had met certain
                          export commitments (led to the withdrawal
                          and/or sale of various foreign companies).

g. Amendment to           Set a lower limit of Rs 1 billion in assets
MRTP Act, 1985            for referring company to the MRTP
h. Foreign Exchange       Commission, limiting the applicability of
Management Act            the Act. Regulates repatriation of capital,
(FEMA), 1999              profits and dividends etc. and current
                          account transactions.

Source: Compiled from Different Sources.

Table III
Tax Rates for Asia-pacific Region

Sr. No.   Country       Tax Rates/Slabs

1.        Taiwan        0-25% (2)
2.        Indonesia     10-30%
3.        Korea         14.3%-27.5% (3)
4.        Sri Lanka     15%-35% (4)
5.        Hog Kong      17.5%
6.        Singapore     18%
7.        Malaysia      20%-28% (5)
8.        China         25%
9.        Vietnam       28%
10.       Thailand      30%
11.       Japan         30%
12.       Australia     30%
13.       New Zealand   33%
14        Philippines   35%
15.       India         41.82% for Foreign
                          Companies (6)

Source: Compiled from Different Sources.

Table IV
Corruption Indices for Asia-pacific Region

Sr. No.   Country       Rank in Corruption
                        Perception Index (7)

1.        New Zealand            01
2.        Singapore              04
3.        Australia              09
4.        Hong Kong              12
5.        Japan                  18
6.        Taiwan                 39
7.        Korea                  40
8.        Malaysia               47
9.        China                  72
10.       Thailand               80
11.       India                  85
12.       Sri Lanka              92
13.       Viet Nam              121
14.       Indonesia             126
75.       Philippines           141

Source: Compiled from Corruption Perceptions Index,
2008, Transparency International

Table V
Labor Market Flexibility for Asia-pacific Region

                        Labor Market
                         Flexibility
Sr. No.   Country           Rank

1.        Singapore            2
2.        Hog Kong             4
3.        Australia            9
4.        New Zealand         10
5.        Japan               11
6.        Thailand            13
7.        Malaysia            19
8.        Taiwan              21
9.        Korea               41
10.       Indonesia           43
11.       Viet Nam            47
12.       China               51
13.       India               89
14.       Philippines        101
15.       Sri Lanka          115

Source: Compiled from Global Market Competitiveness
Index, 2008-09
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