FDI: Finally, taking the bull by the horns
The Modi government announced a slew of economic reforms that have taken away the cap on Foreign Direct Investment (FDI), and thus effectively shutting down a persistent and long festering debate on the utility of FDI. Now, the doors of investment in manufacturing sectors ranging from Defence to Pharmaceuticals, and Services ranging from airlines to insurance and single brand retailing have been finally opened.
In theory, India will never be the same again. It is now expected to become a market friendly and efficient economy with little space left for cronyism. But lets not rush to conclusions. India is still not an easy place to do business in. It still ranks 130 out of 189 in the World Bank’s ease of doing business rankings. Our bureaucracy is still unbowed and creative enough to continue with its rentier proclivities. Nevertheless, the Modi government has taken a major step to speed up industrialisation and to put India in a long anticipated growth trajectory.
Almost two decades ago I was in a public debate with a leading BJP “ideologue” who had coined the slogan “FDI for Computer chips, Yes! Potato chips, No.” The topic of the debate was just this. I argued that the main reason why a country such as India with clearly inadequate capital resources wanted foreign investment was to create jobs and generate value addition for the economy.
The computer chip plant, I argued, was entirely imported, the raw materials used were also imported and the unit costs were low due to severe global competition making for very little value addition. Such highly automated plants employed very few workers. The humble potato chip by contrast involved growing spuds here, picking and processing them here, cooking and packing them here, and consumed by a mass market here. It employed large numbers of workers at every stage of production, implied substantial value addition at every stage and all raw materials were indigenous. Clearly, potato chips were going to make a far greater contribution to the economy, which is why we should welcome manufacture of this kind.
Who owned a business didn’t matter. I recalled Chinese Chairman Deng Xiaoping’s famous and cryptic comment on the issue of nationality of ownership: “It doesn’t matter if the cat is black or white, as long as it caught the mice!” The mice in this case were jobs and value addition.
Economic liberalisation finally came to India in 1991, when the Congress government of PV Narasimha Rao in one fell swoop dispensed with the Industrial Licensing Policy Act, 1952 and dismantled overnight the formidable Directorate General of Technical Development (DGTD), which licensed production, allocated quotas and approved technologies and partners. It was a place where huge rents were extracted for the officials and their political masters. Above all it conferred undeserving profits on favoured capitalists. Take Bajaj scooters and Ambassador cars or Godrej refrigerators for instance. It also ensured that industrial production was effectively emasculated, and job creation curbed.
Consider this. In the early 1970’s when Nelco, a Tata company, wanted to make electronic calculators, the DGTD’s considered opinion was that the annual demand in India was about 600 units and it licensed Nelco to make about half that, in its opinion making it a near oligopoly. Within months tens of thousands of smuggled handheld calculators began flooding the market and Nelco went out of business even before it got going on calculators.
The then prevalent national mood of self-reliance was actually a form of extreme nationalism. India could do everything it by itself. Hadn’t we conducted a “peaceful” nuclear explosion? Hadn’t we manufactured an indigenous jet fighter? The Marut fighter was the design of Dr.Kurt Tank, a former Nazi aircraft designer, but it came a cropper when the government of the day insisted that it has a locally manufactured jet engine, for which we didn’t have the capability then, and even now.
Our fears were largely based on a misreading of history. We believed the conquest of India by the East India Company (EIC) was a direct consequence of the economic power, it had amassed in India. The fact is that the EIC took advantage of the frailty of India’s polity and its frequent internecine conflicts.
We forget that the EIC subjugated India with mostly Indian troops and mostly Indian capital. Indian potentates and princelings collaborated at every step with the EIC in its take over of India. Few Hindu or Muslim rulers opposed it and the Adivasi rulers of Central India posed the only real challenges.
The legacy of this sad history and the misguided enthusiasm for a mishmash of Fabian socialist ideals and Soviet inspired central planning was an India which was economically weak, short of food and industrially backward. The only redeeming feature being that some were doing even worse than us. India with a per capita income of about $220 in 1960 seemed far better off than China with a per capita income of around $95. (Its another matter that we were still beaten in the 1962 war.)
China opened up to liberalisation in 1976 and by 1984 it was outstripping India in per capita terms despite a bigger population. China showed us that lower labour costs confer a huge competitive advantage, and FDI will pour in to take advantage of this to cater to their home markets.
In less than a decade, the entire US and European garment, leather goods and like labor intensive sectors had gone overseas, mostly to China. That China was also a de facto US ally against the still seemingly powerful Soviet Union also helped as the US government shepherded investments towards it. At one time not long ago, FDI companies manufactured almost 70 per cent of its exported goods.
Its another matter that more than half the FDI is from Hong Kong, suggesting much round tripping of illicitly exported capital. Much of the rest is from Taiwan, considered a renegade province, and the traditional and bitter enemy Japan. The lesson is one of pragmatism. It didn’t matter if the cat was white or black as long as it caught mice.
Though economic liberalisation entered our lives in 1991, the arguments, pro and con, flew to and fro with little resolution or understanding that the world had changed. The old paradigms were mostly no longer relevant. Finally the bull of policy recalcitrance has been taken by the horns and turned away. And that is to be welcomed.
by Mohan Guruswamy