Craziness about FDI

by Pannalal Surana

The Finance Minister and his officers have become panicky. There has been persistent withdrawal of bond money. The reasons seem to be two-fold. The rupee is falling. So earlier the withdrawal, lesser the loss. Secondly, multi-national companies need more liquidity in the American market because the Federal Reserve (Central bank of the USA) is rolling back the policy of advancing stimulant money initiated in the aftermath of the 2008 recession. The announcement was made by its Chairman, Ben Bernanke, a few weeks ago.

The flow of both FII and FDI is decreasing for the last three-four years. Our planners are anxious because they feel that the rate of growth of the GDP, declining for the last two years, may take a further dive. Allowing more foreign participation may be helpful. So they are contemplating of raising the present cap in the fields of telecommunications to 74 per cent, defence to 49 per cent, retail to 74 per cent, banking, pension, insurance to 49 per cent. In case of defence, its Ministry has already aired its opposition on grounds of security. Employees in the banking and insurance sectors have been holding demonstrations against that. About the retail, all the major political parties and organisations of traders are up in arms. In a pre-election year, it is near-impossible to sell that policy.

The important point to ponder over is that importing more foreign capital will not help to narrow the gap between our huge imports and limping exports. That would defer, for a while, the obligation of clearing the credits to those foreign sellers from whom we are purchasing the goods imported. The foreign capital is certain to go back, after a few years, to their parent countries along with sumptuous profits. The CAD (current account deficit) in foreign trade today is 6.7 per cent of the GDP. It can be narrowed down either by increasing exports or cutting down imports. Because of the turmoil in some European countries like Spain, France, Italy as also in the USA, which are our main purchasers, there is little scope to expand exports. It would be wise to curtail imports, particularly of oil and petroleum and gold. Imports of oil can be reduced if determined efforts are made to bring down its domestic consumption. The government can decide to put all the vehicles of the political office-holders and bureaucrats in the garages once a week. Private small cars should be discouraged to ply on roads of metro centres. Public transport should be revamped. Secondly, the policy of import substitution must be pursued vigorously. Thirdly, steps must be taken to increasing purchasing power in the hands of 73 per cent of the working population whose daily income is less than Rs 35 per day per head. If the unemployed and the underemployed are provided with meaningful employment, the demand in the domestic market will enhance and stimulate investment in the manufacturing sector. That would also help raise standard of living of the vulnerable sections of society.  Mr Chidambaran and Ahluwalia would do well to listen to these wise counsels and avoid flirting with foreign capital.