FDI: In National Interest, Should We Say No?

Recently, the Union Minister for Information Technology and
Telecommunications, Arun Shourie, almost shocked his audience at a closed door
meeting of an industry association by reportedly naming an ISP which used to
transfer data from its

subscribers’ PCs to a third company with close links with the Chinese army.
Later, the minister made a statement in the Parliament warning the country
against cyber espionage, citing the case of the ISP. He informed that
intelligence agencies found that the company was linked to a Mauritian firm,
which in turn, was a subsidiary of a Hong Kong-based company with connections
with Peoples’ Liberation Army of China and the Chinese intelligence agencies.
"The system is capable of stealing memory of the computer it is linked to
and it could have laid its hands on some valuable intelligence inputs," he
said.

This incident has come to light at a time when the government has been again
talking about raising the foreign direct investment (FDI) level in telecom
services to 74 percent from the present 49 percent level. In the past, whenever
the government has tried to raise the FDI limit, its move has been stymied by a
chorus of protests from sections that see giving management control of crucial
infrastructure services to foreign companies as potentially dangerous to
national security. In fact, this time also the ISP incident led to the Union
Cabinet turning down the proposal. The proposal was a follow-up to
recommendations of the NK Singh panel, which had called for a more liberalized
FDI regime for telecom.

Most of the time the bogey of security threat is dismissed as mere
imagination of misinformed and disgruntled elements within and outside the
government. However, with incidents like the one mentioned by Shourie, the fears
appear to be partly genuine. Interestingly, 100 percent FDI is allowed only in
the ISP business in the telecom sector.

National security is paramount. But should that mean restrictions on FDI?
Restrictions do not make any business or economic sense. It is a well-known fact
that restrictions on inflow of capital raise its cost. And a country like India,
which needs huge amount of capital to invest in areas like telecommunications
infrastructure development, can only be at a loss if the cost of capital is
high. Should it then mean that we should allow any Tom, Dick and Harry with
money to own and manage crucial infrastructure like telecom? The answer here
also is no.

So what is the best way out? Foreign capital, per se, especially if it comes
cheap is not bad. However, real politic demands that a country like India, which
has a running dispute with at least two of its neighbors, must put adequate
regulatory and technological safeguards in place before allowing complete
ownership of telecom services. "I think we need to check the ownership of
the money that is being invested. The government should come up with some
guidelines in this regard," urges a senior government official. In fact,
efforts have been made to implement the idea in the oil exploration sector. In
telecom and other crucial sectors too, the idea is reportedly being considered
for implementation. The oil ministry recently issued guidelines prohibiting
companies from countries like China and Pakistan, among others, from
participating in a bid for awarding contracts for exploration in the Andaman
& Nicobar Island region.

Apart from policy guidelines, in order to make sure that Indian
telecommunications networks remain immune to hostile attacks and no one tampers
with the information flowing on it, the government and the telecom service
providers should both work together to enforce a foolproof network security and
monitoring system. "Such an initiative is very important, given the fact
that telecommunications infrastructure plays a vital role in times of national
emergencies," a security analyst associated with the government,
emphasizes.

Ravi Shekhar Pandey