Rediff On The Net Business News: An examination of the Swadeshi versus Videshi controversy


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February 13, 1997

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The New Nationalism

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 poses a threat to Indian economic sovereignty.

On the other hand, the strategy of import-substitution did succeed in developing a broad base of industries. On the basis of Lall's investigations of technology imports and exports by several developing countries Lall, Bruton say:

'one is entitled to conclude .. that India has created a much broader and deeper technological base than is present either in Brazil or Korea, or indeed any other developing country. It has accomplished this largely on its own.. India has achieved substantial 'know-why' (Lall's term), and has thereby created a capacity for continuing technological development and responsiveness in new fields and new activities.'

However, Bruton also comments,

'At the same time, ... her output and productivity growth record is extremely unfortunate relative to that of Korea and probably Brazil.'

By the 1980s, the failures of the import substitution policy could no longer be ignored. General dissatisfaction with inefficient functioning of industries, particularly public sector monopolies, high rates of inflation and sharply declining foreign exchange reserves forced a rethinking of strategy and a period of liberalization followed.

Between 1985-96 and 1989-90, some dilution of licensing requirements and import deregulation took place. Export incentives were substantially increased, rates of direct taxation lowered, and the excise tax structure modified to some extent in the direction of value added taxation to reduce inefficiency. The reforms during the Rajiv Gandhi era began strongly, but then petered out as they came to face increasing resistance (Joshi and Little, 1994).

The Narasimha Rao government was forced by a crisis situation to take the plunge and introduce a liberalised regime in major spheres of economic activity.

The measures announced by the Rao government have changed beyond recognition the policy towards FDI (Nagesh Kumar, 1995):

The system of licensing has been abolished for all save a few industries.

In 35 high priority industries, FDI up to 51% is approved automatically if certain norms are satisfied.

FDI proposals do not necessarily have to be accompanied by technology transfer agreements.

Trading companies engaged primarily in export activities are allowed up to 40% foreign equity.

To attract MNCs in the energy sector, 100% foreign equity has been allowed.

A Foreign Investment Promotion Board has been authorised to provide a single window clearance.

Existing companies are now allowed to raise foreign equity levels to 51% for proposed expansion in priority industries.

The use of foreign brand names for goods manufactured by domestic industry which was earlier restricted has been liberalized.

India became a signatory to the Multilateral Investment Guarantee Agency for protection of foreign investment.

The Foreign Exchange Regulation Act of 1973 has been amended and restrictions placed on foreign companies by the FERA have been lifted.

New sectors such as mining, banking, telecommunications, highways constructions and management have been thrown open to private, including foreign owned, companies.

All these measures are designed to create a hospitable climate towards MNCs. But is this the only factor influencing the direction and quantum of FDI? Singh and Jun (1995) try to analyse the determinants of FDI by considering 31 countries for the period 1970-93. Their analysis would seem to suggest that as a low-FDI flow country, India would have to pay special attention to having flexible labour laws.

As it attracts increasing amount of FDI, it will have to pay special attention to developing a vibrant trade sector under a liberalized trade regime. Continuity in the policies towards FDI is going to be another critical factor.

The BJP emerged as a strong political force in the late 1980s and part of its agenda seemed to be 'economic nationalism.' One view from the BJP is that we should be more self-reliant because multinationals, particularly American multinationals, are Trojan horses for the CIA and the US government. In a recent debate, an industrialist from the same party welcomed foreign investment but not in the consumer goods sector, the argument being that MNCs in consumer goods will being in elitist goods and so further aggravate social tensions.

Yashwant Sinha of the BJP has been quoted (Business Today, Nov 22-Dec 6, 1995) as saying, '...we stand not only for a level playing-field, but also for greater support to these (i e big Indian) companies.'

The BJP tried to aggressively pursue a confrontationist attitude vis-a-vis MNCs. Karnataka Rajya Raitha Sangh activists attacked the Kentucky Fried Chicken outlet in Bangalore. There was a campaign against Sinar Mas in Pune as also a call to scrap a Japanese industrial township in Haryana.

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.

Continued

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