Intro: Foreign investment proposals should be subjected to a thorough technology and social audit. Only those proposals should be given green light that bring in advanced technologies and do not have a negative impact on employment. Less foreign investment will reduce the risks of destabilisation of our economy due to exit of foreign investors.
India’s trade deficit with China continues to increase. India exported goods worth mere 17 billion dollars last year to China against imports of more than three times that figure at 54 billion dollars. Prime Minister Narendra Modi wants to attract more foreign investment from China to bridge this gap. More dollars obtained from this foreign investment, he hopes, will enable India to pay for the cheap toys purchased from that country. The trade deficit will remain because India will still export less and import more from China. But this will not lead to destabilisation of the rupee because it will be getting more dollars from foreign investment from China. Thus, one of the main achievements during Chinese President Xi Jinping’s visit to India late last year was that China agreed to make more foreign investment in setting up industrial parks in Gujarat and Maharashtra for upgrading the Indian Railways, and making the Delhi-Chennai corridor.
The foreign trade policy of any country consists of inward flow of dollars from exports and foreign investments; and outward flows of dollars for imports and accumulating foreign exchange reserves. India’s policy is to obtain more dollars from foreign investments and use them for imports of goods for consumption like Chinese toys, American apples and Australian coal and Saudi oil for providing cheap electricity to the people. China’s policy is entirely different. China has kept its currency Renminbi low so that exports are buoyant and imports are less. A low Renminbi means that US importers get more Renminbis for a dollar and goods imported from China are cheaper. It also means that Chinese importers get fewer dollars for their Renminbis.
Consequently US imports such as those of Washington apples into China are more expensive. The huge earnings of dollars from buoyant exports are being used to buy US Treasury Bills. China purchased 107 billion dollars worth of US T-Bills in the first five months of 2014. This is equal to about one third of India’s total foreign exchange reserves of 300 billion dollars. China’s policy is to throttle domestic consumption for increasing its strategic power over the United States. A huge holding of US T-Bills means that the US economy is at the mercy of the Bank of China. The Bank of China can start selling the T-Bills in the global market. The US Federal Reserve Board will have to print dollars to pay for these T-Bills. That will increase the supply of dollars in the world economy and lead to reduction of its price. That will bring the US economy crashing down just as an entrepreneur’s world comes crashing down when the bank sells the house mortgaged as collateral security.
The Chinese approach of buying US T-Bills throws light on the character of India’s policy. India is increasingly mired into debt since it is receiving huge amounts of dollars as foreign investment. Foreign investment is a debt. Indian Government guarantees that foreign investors can take out their monies from India whenever they wish. Last year there was mayhem in Indian share markets when the US Federal Reserve Board increased the interest rates and that led to foreign investors selling their holdings and the Sensex crashing. The remittances made by foreign investors had simultaneously led to the rupee slipping to Rs 70 to a dollar. That event clearly shows that foreign investment is a kind of debt that can be recalled at the whims of the lender. The foreign investment taken in by India is fundamentally different from that taken in by China. China takes in fewer dollars from foreign investment than it sends out for the purchase of T-Bills. Hence China can easily sell its huge holdings of US T-Bills to obtain dollars if foreign investors decide to exit. China is like a prudent moneylender who takes fewer loans than he gives out. China is safe.
The different approaches to foreign trade taken by India and China are of momentous significance. India is taking in increasing amounts of foreign investment so that it can pay for imports. India’s policy is like that of head of the family mortgaging one’s house to buy expensive consumption goods like cars, TVs and Chinese toys. China’s policy is exactly the opposite. China is cutting domestic consumption to lend money to the US and establish its control over that country.
So what should be done? The Reserve Bank should start purchase of dollars for purchasing US T-Bills. That will lead to increased demand for dollars, increase in price of dollar and a corresponding decline in the value of the rupee. This should be allowed to happen till the rupee reaches about 75 to a dollar. This will make imports expensive and exports profitable and eliminate the need for us to attract foreign investment to pay for these imports. The price of coal and oil in the global markets is falling. The Government should impose a hefty “energy” tax so that consumption of these goods as well as needs for their import is reduced.
The import tax imposed on coal and oil will lead to increased price of electricity and transport. The voter will be adversely affected. The solution is to distribute the money obtained from the energy tax among all the households in the country by depositing the amount in their bank accounts.
The poor who consume less energy will be net gainers while the rich who consume more energy will be losers. Modi’s voter base will be protected. The objective of providing 24x7electricity should be accompanied with a steep increase in price of electricity.
Devaluation of the rupee will lead to a huge surge in our exports. The dollars earned from these should be used to buy US T-Bills in a joint strategy with China. This will truly make India a superpower.
Foreign investment proposals should be subjected to a thorough technology and social audit. Only those proposals should be given green light that bring in advanced technologies and do not have a negative impact on employment. Less foreign investment will reduce the risks of destabilisation of our economy due to exit of foreign investors.
Modi must reverse the current policy of seeking more foreign investment for providing cheap Chinese toys to the people. Instead he should take the people into confidence. He should tell them that expensive imported goods are a sacrifice that the country has to make to become a superpower.
Dr Bharat Jhunjhunwala (The writer is the former Professor of Economics at IIM Bengaluru)