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Prime Minister Stephen Harper and India's Prime Minister Manmohan Singh take part in a meeting in New Delhi on Nov. 6.

Sean Kilpatrick/The Canadian Press

Canada's new position on takeovers by state-owned foreign companies has provoked puzzlement in India's state-dominated energy sector – and questions about Prime Minister Stephen Harper's sincerity, just a month after he brought Canadian energy industry leaders here to talk up future deals with Indian firms.

In Delhi, the official line on the new rules is that major companies such as Oil and Natural Gas Corp. (ONGC), in which the Indian government has a 69 per cent stake, will adjust their acquisition plans and proceed with investments giving them partnerships or minority shares.

But in private, senior industry leaders questioned why Mr. Harper has made such an effort to woo Indian firms if they are not welcome. They suggested that the Canadian position is hypocritical, given the rhetoric of free trade the government espouses – as, indeed, Mr. Harper did during his one public address in Delhi in November. There is also a sense that the policy is aimed mainly at keeping out China and thus unfairly penalizes India, a democracy.

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The reaction in India underscores the difficult political waters Ottawa will have to negotiate after issuing new policies that put a major roadblock in the way of foreign state-owned enterprises that want to make big acquisitions in Canada, particularly in the oil sands.

"Maybe this policy is just meant to show, 'We treat each country equally,' but there is a lot of difference between India and China," said S. P. Garg, director of finance at ONGC Videsh, the international subsidiary of the firm. "If a Canadian company wants to invest in India, we always welcome that – that may not the case in China."

Syed Akbaruddin, spokesperson for the Ministry of External Affairs, said India's state-owned enterprises "are willing to work within the parameters of Canadian law."

"In terms of our quest for oil and natural gas in Canada or beyond, we'll take it as it comes. There are other [private] Indian companies, not just state-owned, but, of course, these are the priority."

Mani Shankar Aiyar, a former minister of petroleum and senior figure in the ruling Indian National Congress, said the overall message from Canada is clear.

"It is unfair if countries who insist on free trade start becoming selective about who can buy assets and who can't be permitted to do so," he said. "I welcome the current decision to allow the Chinese to purchase the asset [Nexen Inc.] and I hope it wakes Indian companies up to the possibility of going in there – and if they do, and are not permitted, we have to ask on what basis this clearance is being given. I can understand need to preserve assets … but this is against the liberal traditions of Canada to take a position like this."

The most relevant aspect of the new guidelines for India may be the clause that says that a state-owned enterprise wishing to invest in Canada must operate according to "free enterprise principles and industrial efficiency."

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Mr. Garg said that would not disqualify ONGC Videsh. "I don't see this as a challenge … We operate like a commercial entity and not as an arm of the government of India."

But, in fact, India's state-owned energy industries are heavily influenced by domestic policy priorities – including provision of energy at subsidized prices both to favoured industries and to consumers – and by political alliances. The recent allocation of coal resources by publicly traded Coal India, for example, has generated a giant scandal of alleged kickbacks, bribes and political favours.

There is also a perception in India that the new guidelines may have been produced for domestic Canadian consumption, to soften opposition to the unpopular Nexen deal, but that the government 'doesn't really mean it' when it comes to India – a perception perhaps influenced by the fact that the Indian government itself uses this strategy, assuring its population it takes a particular position while quietly pursuing a markedly different one on the international stage.

"I'm sure this decision is not irreversible," said Manvendra Jain, director of upstream and gas for PFC Energy Asia. "It's not a positive development. And I'm sure a lot of other foreign oil companies in the world, not just Indian ones, are hoping that's not the case [that the restriction is non-negotiable]."

Oil and gas imports to India have soared this year, and are responsible for the bulk of the deficit on the national balance sheet. A rapidly industrializing economy accounts for some of this surge, but a crucial factor is much lower-than-expected output from Reliance Industries Ltd., which the company has attributed to technical problems. India is also under pressure to diversify its imports away from Iran, under threat of Western sanctions – India is at present the number two buyer of Iranian crude.

India is anxiously looking abroad for other acquisitions, but is ill-equipped to compete with China, said Neil Beveridge, equity analyst in Asia-Pacific oil and gas in the Hong Kong office of Sanford C. Bernstein Ltd.

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"The Chinese can operate a lot more quickly than the Indians – given the way that they have conditional approval to do [deals], whereas ONGC has to go back to the regulator every time they have to do something, which slows things down."

The Indian firms also shop as though they have less money to spend, he added, all of which is contributing to a sense in the business community here that the country is being constantly bested by China in the race to lock up fuel and mineral resources abroad.

A senior government employee held out hope Monday that the new Canadian guidelines might be relaxed when it comes to India. "They need the cash from somewhere to develop the oil sands," he said, speaking on condition of anonymity. "And maybe if the oil sands guys get [peeved] enough, they can sort it out in Ottawa. They can do that better than we can."

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