FDI: A good step, but a lot more left to do

I have long been arguing that it is better to have 100 per cent foreign-owned companies making their products in India 100 per cent, rather than buying 100 per cent foreign-made products from 100 per cent foreign-owned companies. Liberalisation came to India due to forced circumstances and some adroit statesmanship by then Prime Minister

P.V. Narasimha Rao in 1991. Since then we have been on a cycle of endless arguments and quibbling about it. Liberalisation very simply met the ease of doing business, ease of setting up new industries and easy inflows of foreign investment. Due to our being naturally argumentative we didn’t make any headway. Interestingly, the BJP and the Left were one in opposing a liberalised economic and industrial regime.

Almost two decades ago I was in a public debate with Dr Murli Manohar Joshi, the 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 like 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 catches mice”. In this case, the mice were jobs and value addition.

Economic liberalisation came to India in 1991 when the Congress government of P.V. 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 favored capitalists. Take Bajaj scooters and Ambassador cars or Godrej refrigerators, for instance. It also ensured that industrial production was effectively emasculated and job creation was curbed.

I have also been arguing for long that ownership should not be the issue but value addition and employment should be the criteria. The dividend stream is always the smallest cash stream going abroad. For instance, Hindustan Motors assembles Pajero SUVs imported in kit form from Mitsubishi and hence most of the value addition accrues in Japan. Ford and Hyundai are 100 per cent foreign-owned but make their range locally with more than 80 per cent locally-sourced parts. They create huge value addition in India and also employ many more workers. The technology flows that come here with them for ancillaries stay here and flow into other areas and to companies. It is obvious which is more beneficial to India.

Opening up the FDI doors will not mean that it will now flood in. FDI is a misnomer. It is mostly local money round tripping back from tax havens like Mauritius, Singapore, Cyprus and the UK. FDI will only start flowing when India looks like a good place to invest to resident rich Indians. Along with this, we need to improve much more on the World Bank’s Ease of Doing Business index. Being 130 out of 189 is not good. We must also relook land purchase policies, labour reforms and special economic zones to boost industrialisation and exports.

The legacy of our sad colonial 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.

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 gave 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 American and European garment, leather goods and similar labour-intensive sectors had gone overseas, mostly to China. At one time not long ago, FDI companies manufactured almost 70 per cent of their exported goods.

It’s 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, which is 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. Clearly, the old paradigms are mostly irrelevant. In yet another volte face, the Narendra Modi BJP government has finally found the wisdom, vision and courage to take the bull by the horns. India has crossed a major threshold. Better late than never. We must all celebrate the dawning of good sense.

The writer, a policy analyst studying economic and security issues, held senior positions in government and industry. He also specialises in the Chinese economy.