Reflections On The Industrial Scene

A flurry of recent company reports indicates that the Indian corporate scene shows signs of slackening. While overall growth continues to be positive, the rate has declined. This should ring alarm bells among our policy-makers. The annual reports particularly show the impact of high interest rates and the opening of the Indian market. The reaction among analysts has been Sock it to the Indian corporates. They deserve it; after all, they have had it so good so long. A senior Indian politician rebuked a team of industrialists who had gone to complain to him about dumping by foreign competitors in identical terms. Such surprising insensitivity to the problem of Indian corporates is to be contrasted with the increasingly unctuous eagerness to attract investors from afar.

 

This admiration for things foreign is, of course, not confined to the top. Partly, it is a reaction to the increasing distance from bureaucracy as a result of freedom conferred by the reforms and the neglect of the corridors of power by men in grey flannel suits. Unfortunately, such slighting of the Indian corporate suitor does not necessarily endear India to MNCs. They still have their grievances.

A number of anomalies are emerging in the Indian multinational scene. Many foreign companies find it easy to come in on a 51 per cent basis at the time of entry. As the need for capital increases, they push their Indian compradores out. This may be for two reasons. One, as the foreign company gains insight into the ways of working of the Indian governing elite, it no longer needs the local partner. Secondly, the kind of money power which the foreign investor brings to the table is far higher than what is brought by the Indian partner. The MNCs joint ventures are very often like marriages of convenience. Worse still, the foreign suitor discards the local companion as soon as the one-night stand is over.

Is there a way out ? Or, should there be a way out ? There are the new globalists and free enterprisers who believe in Vasudhadaiva Kutumbakam the world is one family. They ask, Why bother about nationalities of investors? Unfortunately, around the world, people do bother about who owns their industries. The right of self-determination in matters economic is not a myth. Recently, France refused to give governmental permission to a Korean firm which had, through legitimate means, sought to acquire a controlling interest in the French electronic company, Thomson. There are many influential thinkers who believe that it is not good for a countrys economic future if the decision-making in respect of its strategic enterprises in key sectors goes into the hands of foreign companies. While FDI is obviously needed in larger measure, India must also ensure that such FDI does not lead to our economic future being totally determined in London, Chicago, Paris or New York. There has to be a continuous review of the

implications of our new policies as to how far and how seriously the disenfranchisement of Indias entrepreneurship is hurting Indias control over the vitals of her own economic growth.

Malaysia and Indonesia are among examples of countries which have opened their doors to FDI, but on a conditional basis. They insist on a percentage of shares being allocated to local entrepreneurs Bhumiputras (sons of the soil) in the former and well-connected individuals or firms in the latter. While I am not recommending that either of these examples be followed blindly, it is obvious that unbridled opening of the economy to foreign direct investment does create difficult conditions for control of the economy. Multinationals cannot complain that such insistence on local partners is an impossible condition. After all, they are living with such conditions in some of their favourite target countries, such as Indonesia, Malaysia and China. What is, of course, a significant change from India in these countries is the fast track of clearance.

We are also witnessing a new variation on MNC investments. Multinationals are increasingly cannibalising their own Indian subsidiaries, where a multinational parent of an Indian subsidiary is setting up 100 per cent subsidiaries to which it hives off successful Indian brands. The Indian shareholder in the erstwhile Fera companies, who had derived higher dividends because of the brand, is now deprived of his earlier exclusive right. The multinational major abroad is thus building up a 100 per cent equity based on brand loyalty built up by the Indian subsidiary. Horlicks and Crocin are instances of the two recent additions to this new pattern of 100 per cent subsidiaries to skim off profits from their own subsidiaries. While total profits remitted abroad do remain the same, the new device does seem a suspicious variation on the theme of foreign investment for the greater good of India.

Strangely enough, many multinational investors have concerns about Indian economic reform which parallel those of local investors. These are about how far and how fast import liberalisation will proceed. This concern is particularly evident in the auto sector. Perverse as it may sound, some of the auto majors are already worried as to whether liberalisation will proceed too far. They are, after all, coming into India for a share of the market. They are making large investments for making their brand of cars, suited to Indias conditions. If the GOI suddenly goes the whole hog with liberalisation and allows import of completely built cars at a low tariff, the enterprises which the multinationals are now setting up will be sitting ducks. The new entrants are hoping against hope that GOI will continue with its restrictive policy on CBUs till their own markets stabilise. They do admit that there is a contradiction in their emphasis on liberalisation on the one hand and the clamour for restrictions on CBUs on the

other. So long as they are out of the magic circle of local manufacture, they want to come in. Once inside, they want to ensure that no one else can come in and compete with them.

The approach to FDI and further liberalisation of imports are interlinked. If our tariff walls and import restrictions remain, foreign direct investment in the protected areas of industry confers a guaranteed profit to the new entrant. This is what economists call the phenomenon of tariff jumping. Simultaneously, the increased power of MNCs wipes out the weaker Indian industrial entrepreneur who has no staying power. The deep pockets of foreign competitors inevitably lead to a shake-out in which most of the Indian industrialists will either have to sell out or be minority partners. This will be a rather strange way of celebrating the fiftieth anniversary of Indias independence.

Indias policy-makers need to go back to the drawing board to see what continued liberalisation can do to the location of the levers of economic power. While we cannot afford to put brakes on FDI inflow we should simultaneously measure its costs. We should ask: How much will we gain if at all at the expense of sovereignty ? Can we build in sufficient safeguards even as China and others in the region have done ? This is not a plea for swadeshi. It is rather a caution against indiscriminate preference for pradeshi at all costs.