Foreign Direct Investment (FDI) - Unmentioned Pitfalls

Since the launch of "Manmohanomics" by the Narasimha Rao government in 1991 - FDI has been touted as the magic wand that will transform "under-developed" India into an advanced nation with a "modern" infrastructure. Every government that has followed has dutifully talked of taking steps to encourage and expand FDI. Mr Vajpayee in his inaugural address also spoke about the priority the NDA government would give to promoting FDI. In his speech, Mr Vajpayee assumed that everyone understood and appreciated the benefits of FDI. But is FDI - truly the panacea for the ills of the Indian economy?

Critics like Jayati Ghosh - (professor of economics at  Jawahar Lal Nehru University, and columnist for Frontline magazine) - have been warning of the potential dangers associated with FDI. They have pointed out how the majority of FDI has come in the form of speculative investments in India's stock market, where select scrips have seen phenomenal jumps in their stock prices, while stocks of some major Indian manufacturing companies have languished at very low valuations. They have also warned that such speculative investments could leave just as easily as they came, leading to greater instability in India's financial markets.

Others have pointed out how FDI flows have simply enabled trans-national giants like Coke and Pepsi to set up monopolies in highly profitable sectors where Indian business concerns were already meeting the requirements of the market. Coke and Pepsi, with their monopolistic stranglehold on the bottling and distribution chain have wiped out niche producers; consumers have less choice than they did before, and must pay more. Neither have these companies brought in any valuable new technology.

Critics of such FDI flows rightly ask: so where is the benefit for the India in all this? Some defenders of FDI counter with the argument that in order to attract FDI in more important sectors such as Power and Telecommunications, India must permit FDI even in industries where it isn't beneficial.

But two recent articles by Sucheta Dalal, (columnist for the Economic Times and the Indian Express) reveal that even in the power and telecom sectors, FDI has come at a very heavy price. In a detailed review of the highly controversial Enron Power project, Sucheta Dalal exposed the Maharashtra Government's lies and obfuscations in this regard. She pointed out how the Mahrashtra State Electricity Board (MSEB) was paying roughly 5 Rs. a unit to Enron, but had reduced it's purchases from the Tata Electric Company which was selling power at under 2 Rs. a unit. Since the MSEB was selling power at 3 Rs. a unit, it was effectively subsidizing the Enron Power Co.

Free-market liberals who go to great lengths in criticizing subsidies for vital developmental projects involving health, housing, mass transport, and education, are curiously silent about this flagrant violation of free-market principles. This sweetheart deal, signed by Bal Thackeray's cronies in the Mahrashtra Government, is turning out to be exactly the sort of swindle, that early critics of Enron had feared, and tried to prevent.

Reasons for Power Shortages
In an August 19 article that appeared in the Indian Express, Mahendra Pandey & Nandita Shukla exposed several popular myths about power shortages in India. Contrary to the view that power shortages emanate from a lack of generating plants, they identify the the main problem to be poor efficiency of existing plants. Efficiency of power plants is measured by the Plant Load Factor - i.e. the ratio of installed capacity to actual generation. They write: "the power-generation data between April 1997 and January 1998 indicates that only Andhra Pradesh and Rajasthan could achieve 80 per cent PLF, while 10 other states could achieve only 50 per cent. In Bihar, the PLF is 13.6 per cent, the lowest among all states. If Bihar could achieve a PLF of 80 per cent, it would generate 9,524 million units of electricity, against the present generation of 1,619 million units".

They suggest that the  main reasons for a low PLF are inadequate maintenance, leakage of boiler tubes and the use of low calorific coal.  Recently, during a conference on power generation, it was stated that if India could check the leakages of boiler tubes, 5,000mw of additional electricity could be generated.

They also highlighted how power transmission and distribution losses in India are very high. Power transmission losses run around 22 per cent, owing to a combination of poor equipment, improper load management and theft. High voltage lines are increasingly supplementing the grid, but most transmission is still on lossy 220 and 132kv lines.

Recently, the Powergrid Corporation of India's chairperson RP Singh said that only a third of the installed capacity of 85,000mw in India is connected to the powergrid network. Although the country generated surplus power, an inadequate transmission network prevented the surplus power from reaching consumers. As a result, in most parts of the country,  the power situation remained grim. The eastern region generated a 2,000mw surplus of electricity, which could not be utilised. Even in Bihar, there was a surplus generation of 50mw.

Rather than involve BHEL and other Indian companies in the task of renovating and maintaining India's existing power plants, (which they are perfectly capable of doing), and rather than increase the budget for the Powergrid Corporation of India for expanding and renovating transmission lines - all three major political formations (the Congress, the now defunct UF, and the BJP-led NDA) are only talking about increased FDI in the power sector. None have taken the crucial decisions  required to solve the power crisis. They keep repeating that the private sector must be encouraged to solve the problem of inadequate power.

But a recent report on power generation showed that while power-generation in the Central and State sectors almost met their targets - it was the private sector that failed most miserably - generating only half as much power as was expected in the plans. Yet, several economists continue to laud the virtues of the private sector and FDI flows for India's growing shortages in the power sector. They refuse to acknowledge that while  FDI flows a la Enron may increase the availability of power in specific regions -  the power geenerated may be so costly that it may either bankrupt the state electricity board - or make the electricity generated completely unaffordable for the Indian consumer. But it isn't the pwer sector alone, where FDI flows have been problematic.

The Emerging Telecom Scandal
In a  September 19, 1999, column headlined: "Telecom - who listens to the ordinary user?" that appeared in the Financial Express, Sucheta Dalal  exposed the emerging scandal in the telecom sector. When the Indian government opened up cellular telephony to private industry - several foreign investors lined up to enter India's telecom sector. A process of competitive bidding led to licensing agreements that required telecom operators to pay license fees in exchange for connectivity to the fixed-line network that had already been set-up by the Department of Telecom (DOT) and MTNL - the telephone provider in Delhi and Bombay.

But just weeks before the last government lost it's vote of confidence, it waived a substantial amount of these license fees - losing crores in revenues for the Indian tax-payer. Pranab Mukherjee of the Congress and Somnath Chatterjee of the CPM had campaigned on behalf of deliquent cellular operators and Prime  Minister Vajpayee obliged. Mr Jagmohan who had refused to accept these unethical and illegal demands was removed from his post as Minister of Telecom, and both foreign and Indian companies received a multi-crore windfall in the waiver of license fees.

But prior to this huge give-away, the Telecom Regulatory Authority of India (TRAI) had played a nasty trick on India's ordinary phone users. They had posted a new set of rates for local phone users as a result of which many phone users will see their average monthly bills go up by 45%. Most local telephone users are now stuck with higher rental charges, higher per-minute charges, and local calls are now metered every 3 minutes instead of every 5 minutes.

Cell-phone users however received a mini-bonanza from the TRAI on Septemeber 17. Sucheta Dalal wrote how  persistent lobbying by cellphone operators paid off and the Telecom Regulatory Authority of India (TRAI) announced a reduction in cellphone rentals, free incoming calls and a reduction in outgoing call rates.

"Isn't is curious that while ordinary telephone users reel under the impact of increased bills, the TRAI has found time to hear and to correct the ``increased burden'' on the affluent cellphone users?" , she opined, adding that  "cellphone users are represented by aggressive private and foreign operators who lobbied incessantly with the regulator in order to have their rates reduced and  business protected."

The TRAI also saw it fit to lower long-distance calling rates (most important for MNCs and other relatively well-off users) which will cause the  DOT to lose  a hefty Rs 2000 crore annually. This loss will eventually be passed on to local phone users who may see a further rise in their monthly phone bills.

Exposing the TRAI, Sucheta Dalal wrote that the TRAI  had little time for consumers or consumer groups. While the TRAI has studiously met the demands of foreign lobbyists, the TRAI has systematically ignored the sentiments of India's consumer advocate groups. Sucheta Dalal feels that this is probably because consumer groups do not present a serious threat,  that by and large they are ill-organised, under-funded and fragmented, and are given little access to the data on which tariff revisions are based. The Bombay Telephone Users Association (BTUA) says as much in a representation to the MTNL:  "As consumers we are totally confused about the real contents of the new telecom policy of1999.''

Sucheta Dalal goes on to expose how some of the foreign operators deny access to ordinary consumers. She reports: "For instance, Hughes Ispat in Mumbai does not need to open a booking register and provide service on a first-come-first served basis to all applicants. Those who are not part of the creamy layer are politely turned down with the excuse that the company is currently short of lines."

On the other hand, Hughes Ispat has been busy stealing MTNL's largest customers  in the business district of Nariman Point in Bombay (including the Oberoi hotels). While ordinary phone users are being denied access by Hughes Ispat, MTNL is facing  a huge loss of one crore call units.

MTNL has been trying to increase it's revenues through value addition. It  wants to stay competitive by getting into value-added services such as cellphones, internet services and a host of new opportunities that are emerging through e-commerce. So far, its attempt to offer even limited mobility through Wireless in Local Loop technology at a remarkably low price of Rs 1.50 per minute or less, has been turned down by the TRAI.

On the other hand,  its high-visibility campaign to increase the market for internet services, is unlikely to go far because this business may well be stunted by the high call rates. The cost of an hour of net surfing may reach  Rs 30  in terms of call charges alone. Add to this  internet usage charges, and net surfing could well be prohibitive, especially for students, who are an important target segment.

Just as in the power sector, FDI in the telecom sector is turning out to be a quiet fraud on ordinary Indians, who must pay more, and be denied access to cheaper new services even as they become technologically viable.

Conclusion
It is not unlikely that  egregious examples of market manipulation and price-gouging may also occur in the health and other sectors as trans-nationals take advantage of this unthinking and unrestrained hunger for FDI. At best, FDI may be a mixed bag - at worst it could be an impending disaster for ordinary Indian consumers who (based on their meagre salaries and incomes) already pay too much for their electricity supply and phone connections.