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Cola, Chips And Pop-Con?

If the BJP ever comes to power, it will have to temper its economic agenda

Cola, Chips And Pop-Con?
outlookindia.com
-0001-11-30T00:00:00+0553

A lot of the economic policy timber of the BJP may be just bark. For evidence, look at the gradual transformation of the party’s economic thoughts from the strong statements by coalition members to the draft national agenda or the common minimum programme.

As it inches closer to power, the BJP is going through a pragmatic change of heart. The party’s common programme has not only put the mandir and the uniform civil code on the backburner, but the rabid anti-foreigner stance is slowly giving way to a mild protest against multinational corporations in soft drinks and potato chips. Even the irrepressible George Fernandes of the Samata Party has since modified his tirade against the Cola companies of the world, explaining that those that are already here cannot obviously be asked to leave. Even hardliners like Murli Manohar Joshi, who had advocated candles vs Enron a couple of years ago, has been defending his stance on the plea of protecting domestic industry.

Explains senior BJP member and cabinet hopeful Yashwant Sinha: "There’ll certainly be a directional shift in reforms and the foreign direct investment (FDI) policy. We’ll look at the list of areas open to FDI at present and make changes where necessary. All our policy shifts will come in the budget. Everything will be clearly defined. This is nothing that India should be ashamed of. Many countries have similar restrictions. But let’s not scare the foreign investors more."

For all its protest against the economic reforms which began in this decade, the changes proposed by the BJP cannot be detrimental to the country’s long-term interests except in one area: mollycoddling domestic industr y. Let’s look at the three main planks of the BJP’s economic policy, namely government spending, infrastructure and swadeshi.

A return to government: The BJP’s argument that previous governments have neglected infrastructure investment is not new. The fiscal deficit, that crossed 6 per cent during Manmohan Singh’s time and could be reined in by P. Chidambaram only by tightening the screws on government departmental expenditure, forced the finance ministry’s hand. Even as reforms were expected to lead to an industrial expansion, even as foreign capital was being wooed, capital expenditures in energy, communications and ports were cut mercilessly. The much-needed social sector investment in education and health was neglected. Since foreign investment did not come in at the rate expected, after a time lag, infrastructure strained at the seams and industrial demand shrank. It was a situation most industrialists and leading economists had predicted.

There can thus be no dispute over the BJP’s goal of a "jumpstart investment" by the government to set the economy rolling, never mind the serious doubts about the source of investment in the backdrop of a year which will see one of the worst growths in recent history. Nor will anyone disagree with the need for cutting out all the red tape that ties up even the simplest foreign investment proposal in knots and ultimately ends up jeopardising even our foreign trade. Says Sinha: "The foreign investor doesn’t want to come in due to the hassle factor, for being shunted from ministries to departments. If you have a transparent regime of time-bound clearances, investments will come. But if you have a fast-track project that is not cleared in seven years, that’s the worst publicity the country can get. "

To counter this, the BJP is proposing setting up semi-autonomous bodies and vesting them with powers similar to what the RBI has in terms of automatic FDI clearance. These would be the final and only authority for approvals and will clearly lay down rules and penalties for violations. There will just be a system of registration and no further approvals will be required, says Sinha. In fact, even if the BJP is successful in speeding up all the legislative changes that are awaiting clearance, it will have achieved a great deal. Especially since it has eschewed con-frontational politics and promises to try and build a consensus on the direction and sequencing of economic reforms.

But it is the policy of swadeshi, or economic nationalism, the crux of the BJP’s growth formula for the economy, that needs to be handled with great care. In its current avatar, it is no different from the agenda of FICCI or CII, the leading industry chambers which are the spokespersons for the protectionist lobby of Indian industry. Over the past few years, probably because deregulation has started to hurt, these clubs have been demanding non-tariff barriers in industries as diverse as chemicals and petrochemicals, steel, paper, drugs and cement, even anti-dumping duties.

Competition policy:Justifying industry’s cry-wolf attitude, Sinha says: "Swadeshi means competition with clearly defi-ned rules. The BJP has always been in favour of internal liberalisation. That is, an end to the licence-permit-quota raj, cutting bureaucracy and replacing government control by self-control or autonomous regulatory bodies." Adds Fernandes: "It is not being anti-MNC but pro-swadeshi. India has to be built by Indians." According to the BJP, wher e the reforms went wrong is in throwing open the country to foreign investors without real-ising that Indian entrepreneurs, used to setting up a factory merely because a licence was available for some reason, were not in a position to survive the competition. In such a situation, the foreign firms, with their immense money power and trade leverages, found themselves comfortably placed to swamp the marketplace, sway the consumer and eventually edge out the local player. Says Sinha: "The Japanese car industry was first developed at home. If we want our industry to compete with world-class products on Indian soil by lowering tariffs, we owe it to them to give them world-class infrastructure and interest rates and procedures that are comparable with the rest of the world. We have chained their feet and told them to swim."

Therefore, what the new government plans to do is to carry internal liberalisation forward, by creating a competitive environment at home within a timeframe and doing away with monopoly or duopoly. Logically, for the five years or so needed by industry to acquire the skill, multinationals have to be kept out of those areas where Indian industry can manage on its own. And they will be invited openly in big projects like power or ports or highways where neither the private sector nor the government can afford to enter.

More jhanda than nationalism:There are three economic flaws in the swadeshi argument, apart from the fact that it lulls Indians into a false sense of security vis-a-vis global competition. One, how is a domestic company different from a foreign one as a corporate entity? If an MNC comes to India, sets up a manufacturing plant, hires Indian talent, uses Indian raw materials, imports raw materials into India and exports from India, the only way it’s different from an Indian company is that it repatriates abroad. But don’t Indian industrialists take money out? Secondly, how many Indian groups are famous for reinvestment of profits? Says Jairam Ramesh, joint secretary, Congress party: "It’s a far greater crime for domestic industrialists to stash money abroad than for foreign companies to take it out through the legal route of dividends." Two, in terms of value addition, it is unfair to distinguish between products, even microchips and potato chips. Despite the proliferation of computer companies, India exports more computer personnel than computers. How can we undermine the value of that export? Ramesh’s favourite example is the chips controversy. "One, potato chips generate seven times more employment than computer chips. Two, computer companies generate a certain level of skilled employment, less suited to the needs of a developing country. Three, potato chips help in backward integration into agricultural produce. It also adds value to the sectoral output. West Bengal, for instance, is the second biggest producer of potatoes in the country, but adds little value by making byproducts."

Three, swadeshi is also a self-defeating argument. If Indian industry is only allowed to produce things which are easy to manufacture and keep out of high-technology areas or export production, they will never acquire the skill to fight it out in the global arena. Nor will they invest in research and development to improve product quality or portfolio and raise market shares. Along with FDI comes experience, technology and a whole lot of marketing and export possibilities in a third country.

The BJP would also do well to remember that in 1997-98, FDI flow is expected to be $4 billion, $3 billion more than the volatile net inflows through foreign institutional investors (FIIs) in the year. True, FII inflows have suffered because of the depressed capital markets and seesaws in the rupee due to the Asian currency crisis, but FDI is on any day a better bet to acquire worthwhile reserves than floating dollars. That’s also one of the reasons for the rupee’s comparative stability. And a confused FDI policy may well put pressure on the exchange rate considering that the party has ruled out capital convertibility in the next five years and vowed to keep the rupee under strong reins.

But, for all its grand talk, the party may well find it difficult to dictate terms to the foreign investor once it forms the government. That’s clear from the fact that it has already climbed down on the WTO, except in the case of the Multilateral Agreement on Investment (MAI). Protests Sinha: "It’s been a long history of surrender in the WTO. Like the MAI, where our interests are not served. There is free movement of capital, but not of labour. Why should there be linkages, conditions like good governance? We have to find the loopholes and fight every case as it comes."

Where the BJP scores is in trying to recognise a bhagidari sector. Roughly translated, it means the small and tiny sector, including the huge unorganised sector offering both goods and services. In coming years, its size will only increase if the reforms are well-directed. With jobs scarce, a government that propels more and more people towards self-employment should be commended. The question is: will the encouragement take the form of subsidised loan schemes or should it take the form of ensuring a huge free and fair market with equal opportunities for big and small players? That’s the ultimate aim of all deregulation. The success of the BJP’s biggest votaries will also be a triumph of its still-largely-nebulous economic policies.

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