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Swadeshi versus Videshi

The uncertainty over the Tata-SIA airline is the latest episode in the long-running Swadeshi versus Videshi drama. Anindya Sen, Subrata Sarkar and Rajendra R Vaidya examine the economic evidence and ask if foreign investment really poses a threat to Indian economic sovereignty.

In the longer run, is improved performance of the industrial sector contingent upon substantial and increasing inflows of foreign funds and foreign technology? Do such inflows pose a threat to the existence of Indian firms? The Swadeshi versus Videshi debate often presupposes a conflict between the interests of Indian and foreign firms; it extends this to a supposed conflict between the Indian consumers and the foreign firms and, even more broadly, to a conflict between the long-term interests of the nation and the latter.

The Swadeshi versus Videshi debate takes place within the broader context of the debate over 'inward-looking' versus 'outward-orientation policies.' It takes into account both public and private inflows of capital and technology. We will confine ourselves to private capital inflows, because these are the most visible and contentious processes.

In fact, aid from multilateral agencies is not only criticised for leading the country to a debt trap, but also for forcing countries to open up to foreign direct investment and adopt market-friendly policies towards such investment. More specifically, we look at the debate over the merits and demerits of foreign direct investment in India, particularly with reference to the operations of MNCs.

In pre-independence India, the Swadeshi movement was primarily a reaction to colonial domination and the use of political power to ensure economic gains by bestowing unequal market power on market participants. Thus the decimation of the indigenous textiles industry to favour the Lancashire mills led to the call to wear only homespun cloth and public burning of millmade clothes.

The fear of loss of economic sovereignty remained a part of our national psyche even after Independence. To some extent this was a feeling of powerlessness: India was lagging far behind the developed nations and even though she could retain her political sovereignty, there was a distinct possibility that her nascent industries would be swamped by superior imports if she opened herself up to the world.

Therefore, for almost fifty years, India pursued a policy of autarky. The aim was to develop a strong industrial base on her own. Initially, it was also thought that India would turn her face away from the laissez-faire political systems in Western countries and tread a middle path between socialism and capitalism. This would enable the government to capture the 'commanding heights' and ensure that the objectives of equity and social justice were fulfilled. Efficiency and competition were deemed to be neither necessary nor sufficient to achieve any of these goals. The industrial policies effectively eliminated the threat of both domestic and foreign competition.

Implicit in this view was the vision of a homogenous, dedicated group of politicians, bureaucrats and industrialists, who would do their best to utilise the available opportunities, and working in tandem, launch the country on the high growth path. There was no recognition as yet of the problem of bringing into alignment the respective goals of the different power groups -- those who set policies and those who execute them, such as the voters, politicians, bureaucrats at various levels and industrialists -- with the national objectives (the principal-agent problem).

The interests of the consumer class were completely ignored. There was no recognition of the need to create institutional infrastructure to harness properly existing market forces. No thought was given to the possibility of disciplining public sector monopolies which became self-serving institutions, gobbling up scarce resource and giving in turn pathetic rates of return.

Excerpted from India Development Report, Edited by Kirti S Parikh, Indira Gandhi Institute of Development Research, Oxford University Press, 1997, Rs 265, with the publisher's permission.

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