May 30, 2020
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No Beanstalk To Growth Heaven

Big changes are needed in the design of our economy to make foreign investment work for us

No Beanstalk To Growth Heaven
Outside a newly opened MNC retail outlet in Mumbai
Photographs by Getty Images
No Beanstalk To Growth Heaven

One of Outlook’s young journalists was born in 1991, the year Manmohan Singh unleashed economic reforms in India. Needless to say, she has grown up in a completely different India, where the average “middle-class consumer” has access to brands, technology, goods and services that are no different from peers in, say, Manhattan, Madrid or Moscow. Apart from capital convertibility, India is now intrinsically linked to the global economy. In the past two-and-a-half decades, the process of unshackling red tape and opening up the Indian economy to globalisation has taken nary a pause, irrespective of the political ideology of the government of the day. 

“It would be foolish of India to turn its back on FDI in the mistaken belief that it has somehow garnered too much emphasis of late.”
Sadanand Dhume Resident Fellow, American Enterprise Institute

While celebrating the silver jubilee of reforms, some top players in the process have questioned whether India now runs the risk of being too open to FDI (foreign direct investment). In recent interviews to The Indian Express, former finance minister Yashwant Sinha and former RBI deputy governor Rakesh Mohan argued that opening up to foreigners is no longer the sine qua non of reforms. The argument goes that opening up to foreign competition mattered when India was a closed economy. No longer—it could have a negative impact on the domestic financial market or industries.

Apart from the uneasy feeling that this U-turn has been made by the very people who played a role in opening up the Indian economy, is this a bit like closing the stable doors once the horse has bolted? Why do these noises come just when the Narendra Modi government decided to go the extra mile to allow higher FDI under the automatic route (except in certain strategic and sensitive sectors)? When asked by Economic Times about his achievements in the past few years, Modi began with FDI.

The political edge, of course, comes from the opposition within the Sangh parivar. While both the BJP’s ideological parent, the RSS, and the Swadeshi Jagaran Manch, support the Make in India initiative, neither is happy with further opening up of the economy and changes in labour laws to suit the corporates and foreign investors.

Mohan clarifies that his objection is not to FDI but other kinds of foreign investment. “FDI should be fully open but you should not be open to the other types of foreign investment, such as debt market, and be careful about portfolio flow, as they are highly fluctuating.”

“When we are focusing on Make in India, we should have been focusing on promoting our own industry just the way China has done.”
Shankar Sharma Vice-chairman, First Global Stockbroking

Shankar Sharma, vice-chairman, First Global Stockbroking, doesn’t agree. “These are not real concerns as in the debt market there is already a cap and it is quite a low cap,” says Sharma. “While FII (foreign institutional investments) are theoretically called volatile, in reality we have had them for 20 years and data shows that through crisis after crisis, possibly only in one year (2008) was it in the negative. Otherwise, it has always been in the positive whether high or low.”

During 2015-16, FDI equity inflows totalled $40 billion, a 29 per cent jump over the previous fiscal year. From January to March this year, there has been a 7 per cent rise in FDI equity inflow, which reached close to $10 billion ($9.89 billion). In the past 16 years, the services sector has accounted for the largest share of FDI equity inflow (17.6 per cent), with the construction and infrastructure sector coming next (8.4 per cent), followed by computer software and hardware (7.3 per cent), telecom (6.4 per cent) and the automobile sector (5.22 per cent).

First Steps

A family watches ­former PM Manmohan Singh on TV

Photograph by Getty Images

For policymakers who thought banking on foreign ­investments would give a boost to their grand plans of turning India into a major manufacturing hub, however, the trend so far has not looked promising enough—this despite the fact that the focus has decisively shifted from shielding companies from competition, like the pro­tect­ionist Bombay Club of the early 1990s, to building world-class domestic companies and ­protection of strategic interests.

“Globally inviting investments is a part of liberalisation. We are in the right direction, but the pace should be much faster than what we are able to do.”
Parth J. Shah President, Centre for Civil Society (CCS)

The real problem, explains Sharma, is retaining our strategic interest in sunrise industries such as the internet from foreign players who would like to exploit our market at the expense of our home-grown companies (Flipkart versus Amazon or Alibaba is a classic example). “The government should have first focused on promoting domestic industry like creating our own e-commerce giants just like the previous governments had done in banking (HDFC) or automobile (Maruti) sectors very much on the Chinese model of industrial development,” says Sharma.

Ashok Chawla, former finance secretary and current chairman of the National Stock Exchange, recalls that in the 1980s when the FDI policy first got articulated, the cornerstone was to get access to new technology while granting approval to foreign investment proposals. “In fact, every proposal was looked at from that angle. Today, there is no specific basis on which foreign investment is allowed, except in some sensitive areas like defence and security, aviation etc,” says Chawla. Ironically, even in defence the government has recently ­diluted the condition of ‘hi-tech’ to ‘modern technology’ without defining it.

Questions are also being raised about the direction of reforms, which have mostly ­neglected the socio-economic changes that could have helped the country capitalise on its demographic dividend—the 65 per cent population that is below 35 years.

M. Govinda Rao, former member of the 14th Finance Commission and former ­director of National Institute of Public Finance and Policy, is all for opening up of the economy. “Obviously, we should open up,” says Rao. “There is no other way. But then, we should also do lot of internal structural reforms so that we can get the advantages we are seeking.” Urging greater flexibility in labour laws and a social security system, Rao cites the example of the textile and leather sectors, both of which are set to receive substantial government investment. In both cases, however, the objective will not be realised if the labour laws are not conducive, he points out.

Reforms have mostly shied away from socio-­economic changes that could have helped the country ­capitalise on its ­demographic dividend.

Economic reforms have also been focused on getting the government out of the business of doing business.  “We should pursue disinvestment and privatisation more agg­ressively,” says Gurcharan Das, author and former CEO of Procter & Gamble India, who believes reforms are “only half-done and we have a lot more to do to create jobs. FDI and privatisation will create jobs.”

So, where is it that the reforms have not delivered? “Economic reforms must be judged not merely in terms of legislative achievements or successes but also on the basis of whether deprivation in its multiple forms has diminished substantially,” says economist Raghav Gaiha. “But that record has been mixed and patchy.” The poor, for example, are more likely to be undernourished than in the early 1990s, he points out, and the quality of education has rapidly deteriorated at all levels. So, while FDI may help bridge some of the resource gap, it is unlikely to enhance welfare levels significantly. The focus must shift to policies that will. Going into why that has not happened yet, former RBI governor Y.V. Reddy says many economic reforms have been led by the “tyranny of the 10 per cent”.

No doubt, India has travelled a great distance since the economic reforms started. It has helped raise incomes and access to better facilities at least in the cities and small towns. But there is a long way to go. Shutting one’s eyes to the major gaps in reforms, particularly in healthcare, education and skill development, is dangerous. As is the mistaken sense that the solution to India’s many problems lies in more opening up to foreign investment.

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