The Telegraph
Since 1st March, 1999
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- The nationalist argument against foreign investment is self-serving

The author is former director general, National Institute for Applied Economic Research [email protected]

When Murli Manohar Joshi in 1992 expressed his willingness to accept foreign investment in India in computer chips but not in potato chips, he made the first policy statement on swadeshi after Mohandas Karamchand Gandhi advocated a blanket boycott of foreign in favour of Indian manufactures. He meant that he was open to foreign investment that brought modern technology into India, but was unwilling to accept foreign investment in consumer products. The Swadeshi Jagran Manch of the Bharatiya Janata Party, and M.D. Nanjundaswami, the self-styled farmers’ leader, soon followed with more explicit statements.

The former made statements against opening up to foreign investment and lower import duties. The latter burnt the premises of the Kentucky Fried Chicken outlet in Bangalore and the Bellary offices of Cargill Seeds. I recall my discussion on television with a leader of the SJM, who pointed to the success at that time of BPL, Onida and Videocon, in standing up to the entry of foreign brands, because they had many prior years of protection to become strong. That enabled facing foreign brands in the market. India has come a long way along the path to opening up of the economy and globalization since those years.

Foreign brands have whittled away a good part of the leadership of Indian television brands, as with other consumer durable products. In other areas, Lafarge, for example, has become among the largest cement manufacturers in India. It was not in India in 1992. Lakmé is a Lever company, as are Kissan, Kwality and Modern Bread. Parle soft drink brands like Thums Up and Limca are now part of the Coke stable, while Duke’s Mangola is part of Pepsico. All this has benefited the consumer. He has better products with more features, at very affordable prices. In the process, many Indian brands and companies have been bought over or have shut down, an inevitable event in view of their unwillingness to change.

Over ten years, the swadeshi argument, to halt or at least slow the process of opening up of the economy, has become more polished. Behind these arguments are powerful Indian corporate lobbies, pushing their self-interests. “Bombay Club”, the earliest industry group to speak out, added sophistication to swadeshi, with the demand for a “level playing field”. The argument was that industrial inputs in India like electricity, road transport, shipping and so on, were expensive and of poor quality, and put Indian companies at a disadvantage. This disadvantage must be recognized when reducing the levels of import duties. In the event, import duties came down and many of the “Bombay Club” who took corrective actions, have survived.

Others are dying or have died. Some got a scare, like Bajaj Auto, which despite massive cash reserves had not spent on research and development and brand-building, and rapidly lost market share till they began to use their financial muscle in the market. Others like Chemplast began to focus their businesses instead of a presence in an array of markets. Some companies handed over management to competent professionals instead of leaving it to members of the founding families. Around 1995, a scare was raised about dumping by other countries, especially from southeast Asia and China. This led to India for a while having the largest number of anti-dumping cases in the world, but the scare may now have died down with the realization that India’s technical prowess is superior.

A former Lohia socialist, the eclectic George Fernandes has raised the latest swadeshi argument. It is the most visceral one and is about national security in the context of the proposal to disinvest in two Central-government-owned oil companies. He asks whether private Indian or foreign owners would take prompt action to raise oil and gas reserves when required for reasons of security, as has been done by the companies under government ownership. He forgets that government has the powers to impose this requirement, with the extra costs borne by the government. Other countries manage such situations. Similar considerations did not occur to him when foreign investment was allowed in media, in airports, telecom and other areas. Could it be that this sudden patriotic impulse to national security reflects the interests of some Indian companies' These companies would prefer to postpone oil company disinvestments until they are ready with their retail networks, when they can buy the government companies at bargain basement prices.

A good argument was about foreign imports conforming to Indian packaging, standards and other laws. This is in the interests both of the consumer and fair to Indian producers.

The swadeshi arguments listed so far can be countered easily. However there are two that have not been made that merit consideration. One relates to situations in which Indian companies have a potential to dominate the world but must have the time to build themselves up. One example is of Asian Paints. When ICI tried to buy it up, ICI had only about a third of its market share. The second is that of the pharmaceutical industry, in which India has natural advantages that lead to low cost R&D, high-quality science and low-cost manufacture. Should we not enable them to grow under a process patent regime in which they can copy processes as hitherto, before we accept the product patent regime that will prevent it, as required under the World Trade Organization' The present giants in the industry, like Ranbaxy, had taken full advantage of India’s recognition of only process patents, to rapidly grow to their present size.

The problem here is that we need a neutral body to identify the companies and industries that have such potential. The government cannot be trusted to do it honestly, subject as it is to the intense lobbying by interested companies. It was done in the case of information technology because an industry-group led by respected leaders proposed measures to build the industry. Also, the rest of the world was not too concerned with Indian IT policy at that time, and there were no established local counter-interests.

Thus the swadeshi-videshi argument has developed considerable sophistication over the last ten years. From being merely for protection, it has positions on dumping, national security, patents and compulsory licensing, local product standards and domestic packaging laws. But its basic objective remains the same, to stall the opening of the economy to foreign investment and competition, and sometimes, as in the case of the oil companies, even to Indian private ownership.

As the arguments become more specific and focussed, there are more of the early liberalizers who get converted to them. What would be far better is if they were to concentrate on the protection given to them by the macro-economic framework. Thus, India may have been right in not going for export-oriented and import-dependent growth. Countries that have done so have been buffeted by the ill winds of recession in developed countries, and currency speculation.

We were right in limiting currency convertibility to the current account and not extending it, despite all the pressure, to capital account. But our protection to agriculture may not have been in the best interests of economic efficiency. The continuing reservation for small-scale industries for most of the original (George Fernandes-created) list of products has diminished our competitiveness. We have yet to change our labour laws, though it appears that much of industry has learnt to live with them.

The swadeshi argument may appear to be a nationalist argument. But it is self-serving, in the interests of specific lobbies that have learnt to use easily “educated” politicians. It would be far better if they were to concentrate on macro-economic policies which can buy time for our industries to adjust, than to look for more detailed actions.

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