FOREIGN DIRECT INVESTMENT: Why Discriminate?

One of the more liberal decisions taken by the Government of
India was to allow 100 percent Foreign Direct Investment (FDI) for e-commerce.
This decision is likely to be appreciated more abroad than in India.

However, as per Government regulations, FDI cannot be more
than 49 percent for the ISPs. The difference between the ISPs and e-commerce
companies is very little in terms of technology and competence. ISPs have to
invest considerable amount of money in infrastructure. They have to either
construct their own or lease inter-city transmission capacity. For heavy users
of Internet they have to provide dedicated broadband leased-lines (from DoT or
by themselves). As an alternative to the dial-up facility on the Public Switched
Telephone Network (PSTN) of DoT/DTS, they could deploy Wireless in Local Loop
(WILL), which also involves heavy investment.

The international gateways connecting Indian ISPs overseas
also involve considerable investment. Apart from the telecom facilities, they
also have to invest in routers, switches, and connected computer equipment and
software. They can make money not from giving access to Internet, but by
providing e-commerce on the network they build for the Internet service.
Globally this seems to be the trend.

On the other hand, the purely e-commerce companies have
little capital requirements. The money is spent only to cover the costs of
creating portals. Other parties can actually create all this. They can also be
hosted by any ISP. Foreign companies with 100 percent equity can simply put up
portals and web sites with less capital, deliver the content and offer
e-commerce through the ISPs. They already have foreign content to be put on
their portals. Such companies are bound to have greater advantage compared to
Indian ISPs. The idea of 100 percent foreign ownership is to attract FDI. It
would be better if even the ISPs were allowed to have 100 percent foreign direct
investment. Then, ISPs offering e-commerce and e-commerce companies would be on
a level playing field.

Some may be of the opinion that 100 percent equity FDI for
e-commerce companies and a restriction of 49 percent for ISPs may seem
detrimental to Indian ISPs. But with so many Indian IT companies setting up
bases in the US very freely, it is illogical for India to object to 100 percent
FDI. In fact, the reaction of the Indian ISPs is positive though not good
enough. The ISPs want that the limit should be lifted so as to facilitate
greater foreign investment in the Internet service business.

Four years ago, President Clinton had first proposed that all
transactions (sales or money related) on the Internet should not be taxed. This
makes sense because it is very difficult to determine in which country a
transaction has been concluded. On the Net information does not flow only
between countries of origin and destination. It can travel on the networks of
several countries. Therefore, the decision of not taxing transactions on the Net
is in line with the rest of world.

It appears that both these decisions are at the behest of the
Ministry of Information Technology (MIT). With regard to telecom there should be
an equally liberalizing and facilitative attitude. For example, the Indian ISPs
are now constrained with inadequate bandwidth within the country and to
international destinations. The international connectivity is governed by VSNL.
It is not that there is not abundant submarine cable capacity. If the
international company, which brings in capacity is free to sell it to Indian
ISPs, the latter could be paying one-fifth of what the monopoly VSNL charges.

Inexpensive and abundant global inter-connectivity is in the
interest of India. It would be right for the Government to decide that the
submarine cable capacity is sold at competitive prices. Only then can we realize
the objective of the liberal policies being promulgated by the newly formed MIT.

Dr TH Chowdary

The author is director, CTMS, a member of the PM's IT Task Force and IT advisor
to the Government of Andhra Pradesh