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Invest in a dream

Beyond a point export pessimism is indistinguishable from growth pessimism. The consequence is more confusion piling upon confusion that was already there.

There is actually a pattern which depicts how pessimism gathers strength. Let it be assumed that the prayer of domestic devotees for foreign investment is adequately answered. Foreign investors arrive on the scene with loads and loads of investible capital. They are expected to set up new factories embellished with latest technologies and raise prodigiously the level of production.

This process will mean the death of local industries in various sectors. Domestic consumers will cross over from the consumption of locally produced goods in traditional industries to products that are the fruits of foreign investment.

It is, however, not enough that production by local producers is substituted by production by foreign investors. What the foreigners produce will, it is hoped, prove to be competitive in the international market, thereby raising the country's exports and foreign exchange reserves. The pessimists will chip in at this point. There is no a priori ground, they will argue, for assuming that exports will soar automatically.

True, if the foreigners bring in the latest technology, it will be a major gain. On top of that they will have the advantage of cheap labour that is locally available. But as realists we have to admit that the imported technology will have a modest labour content; in any event, domestic wages for skilled labour will exhibit an upward trend, so much so that the advantage of engaging local workers will not be as attractive as was initially thought.

Even if these apparent trivialities are ignored, one major issue cannot be bypassed. Foreign investors will have to seek working capital from the local banks. The prevailing rate of interest in a poor country such as India is easily double or triple of what the rate is in the United States or in any other advanced country. In the circumstances, it is altogether doubtful whether the output generated by foreign investment will be able to compete favourably in the international market with similar or identical goods produced in the advanced industrial countries. The scope of additional exports is therefore likely to be extremely limited despite the generous inflow of foreign capital in the form of direct investment.

Those who persist in dreaming rosy dreams will join issue at this stage. Since so many concessions have already been accorded to foreign investors, why should not the native government decide to subsidise heavily the rate of interest for working capital borrowed by foreign investors? Again, let us hypothesise that this indeed is what is going to happen.

But the very moment the decision is taken to subsidise heavily the interest rate for borrowings by foreign parties, there will be a fresh crisis and not just on account of heartburn among the domestic producers. The banking sector itself will be caught in a jam. If foreigners are to be offered subsidised credit, there is bound to be a sharp drop in the profitability of banks.

It is even conceivable that, other things remaining the same, the profitability of some of the banks will turn negative. The government of the country will be greatly embarrassed and will come under pressure to redress the situation. It might perhaps be compelled to send a directive to the banks stating that to compensate for the subsidy to the foreign companies, they should further raise the rate of interest for the local manufacturers.

Can we foresee the outcome in case such a measure is enforced? The unit cost of production of domestic output will increase sharply across the board. Not only will domestic consumers suffer as a result, the rate of inflation in the country will be pushed further up. That apart, it will have grave social consequences too. With inflation rampant in the economy, conditions of instability and social discontent are likely to spread all over the country. And in case this should be the denouement, foreign investors will take fright and leave. And therefore we will be back to the low level equilibrium from where we started.

But let us be fair. There is no convincing reason why the line of reasoning adopted by the export pessimists will rule the roost. This is largely a matter of specific circumstances prevailing in the country. We have to take into account the hard datum.

Take, for instance, the developments in India in the course of the past decade. With all the efforts our government has put in to entice direct foreign investment, the record of achievement is disappointing. Official sources have themselves let out the fact that aggregate foreign investment during the decade was well below the foreign investment that has entered China in a single year in the recent period. Injured innocence will scarcely be of any avail here.

Thus as long as the socioeconomic situation in India compares unfavourably with China's in the judgment of Western investors, there will be little prospect of foreign direct investment entering India attaining the level of foreign direct investment flow into China. At this point, economists will perhaps be joined by sociologists, anthropologists and others. They will hold intense consultations amongst themselves to ferret out the reasons for the inferior attractiveness of India to foreign investors relative to China, Indonesia and the Philippines.

An earnest graduate student from an American university, what do you know, could even rush with a Ph D dissertation on the theme and offer umpteen speculations about how the cookie crumbles in different under-developed countries. Please do not be unduly concerned if s/he comes up with, for example, what is to him or her a credible explanation for dissimilar magnitudes of capital ingress into India and China.

In China, corruption is not unfamiliar as it is not unfamiliar in India. However, when a corrupt person is caught red-handed in China, s/he is summarily executed. In our country, the individual will perhaps be chosen to stand for elections, be elected to the Lok Sabha and sworn in as a minister.

Another plausible explanation is the vastly more efficient administrative set-up in China in contrast to the near-anarchy prevailing in India. Much worse, there is a tendency to idolise this near-anarchy. Many of these suggestions, some will say, are sanctimonious nonsense. Indians will have an altogether different point of view. Theirs is, they will claim, as much god's own country as the United States is; all it lacks is a quantity of direct foreign investment.

Does it not sound like a parable on vicious circles? Round and round we go, but at the end of our strenuous exertions, we find ourselves exactly at the same spot where we began. This is stagnation par excellence, did you say? In a free democracy, you are entitled to your own opinion.

Ashok Mitra