Fdi Fallacy

Thus, economists want it because they believe that Indian savings are not enough to sustain a 7-8 per cent rate of GDP growth. Consumers want it because they believe that it will improve quality. Indian firms want it because they believe that they can ride piggy-back on foreign firms and increase market shares. Bureaucrats want it so because the politicians tell them to and, of course, the politicians want it so because they see infinite possibilities for backhanders.

In other words, though the motives might differ, the majority of Indians are in favour of increasing foreign investment in India. Yet the agonising goes on, largely because having agreed that foreign investment is a good thing, Indians can't quite decide in which areas it should be allowed.

 

For instance, most people think it is a bad idea to allow foreign investment in consumer goods industries like colas, potato chips, toiletries, TVs etc. Let it come into industries like power, telecoms, oil, ports etc, they say where it will do some good.

A small minority believes that foreign investment should be allowed into all industries and that it is nonsensical to have licensing for some and not for others. After all, they argue, the objective reasons are the same for all, so why discriminate against some?

An even smaller minority, to which I belong, believes that it is dangerous to allow India's strategic industries like power, telecoms, oil etc, to go into foreign hands, while inconsequential ones like toiletries, colas and consumer electronics are protected.

This is because it should be obvious to even the worst patriot that a country which allows its core infrastructure industries to be dominated by foreigners could have a security problem. It has happened once before, when, in 1962 during the Chinese war, the oil MNC's played rough. (As a consequence, they were booted out by 1970 and Indian Oil Corporation became a virtual monopoly).

Could Colgate-Palmolive or Levers or Coca Cola have done what the oil MNCs did? Those who talk so fervently in favour of keeping out foreign investment out of the consumer goods industries never pause to ask this question. More is the pity.

The central economic argument in favour of allowing foreign investment into only the core infrastructure industries is, of course, that these are capital intensive and that they require modern technologies. India has neither capital nor technology in requisite quantities, so foreigners are needed.

Actually, this is nonsense, at least the capital part of it. If only the government would improve the policy regime for these industries, enough capital will be generated. Technology, of course, is a different matter but generally, it can be bought along with machinery.

Indeed, a strong case can be made by saying that Indian capital should focus more on the core industries, while the foreigners focus mainly on trivia. That way real economic power and real profits will remain in Indian hands.

Unfortunately, policies are being designed in exactly the opposite way. The motive can only be to protect incumbent private capital, while incumbent public capital is asked to fend for itself.

That way lies danger.