GLOBAL steel companies Posco and Arcelor Mittal have cancelled their plans to invest in India due to local opposition and difficulties in acquisition of land. Wal Mart and other retail majors have not made any investments because they are not happy with the requirement that 30 per cent of all goods should be sourced in the country. Now oil major BHP Billiton has withdrawn from oil exploration because of delays in obtaining clearances from the Ministry of Defence. We need not panic due to withdrawal of these companies. This withdrawal may, in fact, be good for us.
A study by Narayan Sethi, Assistant Professor in Economics at National Institute of Technology, Rourkela found that FDI is positively correlated to the economic growth of Bangladesh negatively correlated to the economic growth in India. In both cases the role of FDI was weak; not deep and strong. Another study by Sarbapriya Ray of University of Calcutta found that there was positive relationship between FDI and GDP. But she found unidirectional causality which runs from economic growth to foreign direct investment. This means that economic growth was taking place from other reasons and attracting FDI. FDI was not helping attain higher levels of growth; instead FDI was coming to reap the benefits from higher growth that was taking place anyways. Yet another study by Rudra Prakash Pradhan of Indian Institute of Technology Kharagpur found a positive relationship between FDI and economic growth in Singapore and Thailand but not in Indonesia, Malaysia and Philippines. These studies indicate that the impact of FDI on our economic growth is uncertain and may even be negative.
Many other studies indicate that FDI has a positive impact if domestic institutions are strong. This actually makes a case against FDI. If domestic institutions are strong then domestic capital can be easily mobilised in a large country like India. In this case we do not ‘need’ FDI to meet our requirements of capital. On the other hand, if domestic institutions are weak then FDI has a negative impact on growth. In that case too, we do not need to attract FDI. In either case there is no case for attracting FDI.
Other supposed beneficent effects of FDI are not convincing either. First effect is said to be of advanced technology. It is true that quality of goods produced in the country has much improved after opening of the economy in 1991. This can be seen most clearly in the improvement in quality of cars after the entry of Maruti. However, the same technological advancement would most likely have taken place if we had opened the sector to domestic competition. Tatas and other businessmen had been seeking licenses to manufacture cars. The Government refused to give them licenses and protected the monopoly of Hindustan Motors and Walchand. It was this monopoly that enabled these companies to sell outdated models. It must be accepted, however, that in some cases MNCs have proprietary technologies which can only be accessed by us if we allow them to invest. Such FDI may be beneficial for us. It is necessary, therefore, to make a technology audit before clearing FDI proposals. Much FDI is coming for harvesting brand value without adding substantially to quality of goods. Such FDI is may not be encouraged.
The beneficent impact of FDI on capital is also suspect. Knowledgeable persons tell me that a large part of FDI in India—maybe around eighty per cent—is actually Indian black money that is being round-tripped. Black money is sent out of India and comes back in form of white FDI. Indian are sending large amounts to be deposited in Swiss Banks and other tax havens. Indian economy is like a big broken pot. Large amounts of money are flowing out from the holes at the bottom. Lesser is being filled in from the top. Yet the Government is focused on increasing the smaller inflow from the top; and dilly dallying in taking measures to stem the outflow from the bottom. My take is that we have more to gain by stopping the outflow from the bottom. We must improve governance so that our capital is retained in the country. It will not do to seek foreign capital when our own capital is seeking an exit. For all these reasons I am quite comfortable with the exit of MNCs from India. Maybe this will force our Government to rectify the red tape and corruption which is the main obstacle to investment and growth.
Exit of Posco and Arcelor and hesitation on the part of Wal Mart is welcome for another reason. Posco and Arcelor exited because of opposition from local people and difficulties in land acquisition. Local people do not have better alternate means of livelihood. Similarly, hesitation on part of Wal Mart is because it does not want to source goods from India. The Government has imposed this condition to pacify the Indian people. Implication is that MNCs are exiting because people of the country do not see their entry as beneficial for them.
India is a labour abundant country. The capital intensive model of production espoused by MNCs is fundamentally unsuitable for our country. Indeed capital intensive production by domestic companies is equally harmful but MNCs are almost wholly tied to capital intensive model hence they are rightly targeted. Exit of MNCs may, therefore, save the livelihoods of many of our people and also not cause any harm to our economy as shown by studies cited above.
That leaves us with the question of China. True that China’s growth rate is high and it has attracted huge amounts of FDI. But there are three factors that must be taken into account. China had destroyed its tradition of entrepreneurship during thirty years of Maoist rule. It needed to attract MNCs to bridge this entrepreneurial deficit. India does not have such a deficit. Secondly, China’s domestic savings rate at about 40-45 per cent appears to me to be the main driver of economic growth. China could have attained similar high growth rates—even more—if it had abstained from FDI. Third, China has embarked on a policy of environmental destruction to attain high growth rates. Our circumstances are different. We have a long entrenched tradition of entrepreneurship. Our savings rate is low. This cannot be compensated by FDI. And it is better that we accept a lower rate of growth rather than invite environmental retribution as seen at Kedarnath this summer.
We should let the MNCs go; and focus on improving domestic governance so that our capital stays in the country; and competition encourages domestic companies to acquire frontline technologies