BJP, Mamata Misguided on FDI

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India and foreign direct investment are an odd couple. They don’t seem to go well together, at least in some parts of this nation of 1.2 billion people.

Last Friday, India’s cabinet decided to permit foreign investment in the retail sector, a bold move dubbed by the prime minister as a “big-bang” decision.

The decision means that India’s lucrative retail market, now dominated by domestic traders, will be open to foreign investors who would pump an estimated $16 billion into the economy in three years.

Immediately after the cabinet approval, the Bharatiya Janata Party, the main opposition group, and the maverick chief minister of the state of West Bengal pledged to fight to reverse the move.

“We are totally against these decisions. We were not consulted by the government,” flatly declared Kunal Ghosh, spokesman for West Bengal’s Chief Minister Mamata Banerjee.

BJP spokesman Balbir Punj vowed to “fight it tooth and nail.” His party has called for a day-long nationwide general strike on Thursday to protest Singh’s decision. Ironically, it was the BJP that had proposed the newly adopted measure a decade ago when it was in power.

Indeed, folks like Banerjee, whose political organization is a partner in the Singh government, and Punj could throw a monkey wrench into his plan.

Banerjee is anti-everything. She pushed away Tata’s Nano car factory two years ago, costing West Bengal thousands of high-paying jobs. Last year, she vetoed Singh’s plan to sign a water-sharing pact with Bangladesh, causing new wrinkles in Dhaka-Delhi relations. Now, she is brandishing her sword at FDI, a move that would push India’s growth train off fast track, if she succeeds.

Mamata’s ideas are stale. Didi still lives in Nehru’s ideal state. She seems to abhor the thought of stepping into the new world, where India faces Himalayan challenges, including dealing with a mighty and menacing neighbor.

To a make up for the lost opportunities, India’s economy must keep humming like a bullet train. Evidence is plenty that capital inflows spur a nation’s growth engine.

With a $3 billion U.S. aid in 1953, war-ravaged Germany rebuilt its economy and became a bulwark against Communism. South Korea received $636 per person per year for three decades and secured its seat at the table of the rich.

A more recent example is China, which took in as much as $45 billion a year in foreign capital in the 1990s. Its openness to FDI helped it grow more than 9 percent a year on average, boosting its per capita income fourfold between 1978 and 2000. By contrast, India just doubled its output during the same period, according to International Monetary Fund estimates.

When China’s reforms began in 1978, its foreign capital inflows were a big zero. By the 1990s, its share was only second to that of the United States. China, however, was not better placed than India to attract outside capital. Both were closed economies, plagued by low income levels and heavily dependent on agriculture.

China welcomed FDI right from the beginning of its economic reform process. Beijing had realized early on that new capital would introduce new technologies in China and uplift its export sector. It swiftly moved to tear down obstacles to foreign direct investment when investors complained. India needs to do more than just dismantling barriers to draw foreign investors.

“Apart from economic environment, political commitment is an important ingredient in attracting FDI,” observed IMF researchers Wanda Tseng and Harm Zebregs in a policy paper, “Foreign Direct Investment in China: Some Lessons for Other Countries.”

India and China share many attributes that affect capital inflows, such as labor force, market size and overseas Diaspora. If China could lure investors, there is no reason why India could not do the same. But there is one catch.

“There is a big difference in how political choices are made among countries. In China, the political leadership imposed a vision for the path of growth and development of the country,” the researchers noted.

The new breed of Indian leaders must develop a vision as to where they want to take the nation and how. Singh’s policies have served India well. Future leaders should pick up from where he would leave off, rather than sacrifice his initiatives at the altar of gruesome politics. Welcoming foreign direct investment is a right step to move India forward full steam.

India’s chronic opposition to FDI has caused concern among U.S. investors. One investor recently described the world’s largest democracy as a less than attractive place to bet on.

“The soon-to-be most populous country in the world should be a long-term source of opportunity for efficient companies and retailers, but India’s policies are making it difficult for investors, new businesses and, worse, its own citizens,” commented David Harris, chief investment officer at Rockefeller Financial, a money management firm in New York.

The most recently available foreign direct data from the UN’s statistics division bear this investor pessimism out: India’s FDI inflows peaked at $42.6 billion in 2008 and plunged dramatically to $24.6 billion in 2010.

In a recent report on global investment opportunities, Harris complained that “India has capriciously applied the law or rewritten laws retroactively to punish a range of companies, including Vodafone, Telenor and Tata Motors.”

Vodafone, the UK-based mobile operator, has been charged with a significant tax bill that was applied years after it made an acquisition in India. Telenor, a Norwegian-based mobile operator, had its licenses canceled a few years after investing in India, causing it to take a multi-billion dollar write-off, he noted.

Last year, American billionaire investor Warren Buffett fumed over the 26 percent limit India imposed on foreign ownership in the insurance sector, saying the restriction discouraged outside investments in India. His company, Berkshire Hathaway, had $38 billion to invest. Indian businesses would certainly hope to attract some of that capital.

West Bengal’s misdirected policies dimmed its prospects to be a shining jewel in India’s economic crown. The state slipped from rank 4 in 2007 to rank 13 in 2008 in industrial investment plans, according to one study by an Indian business group.

Banerjee professes to be dedicated to the cause of the have-nots, but her position on FDI will harm them. Empirical evidence suggests that capital inflows power the engine of the prosperity train and thus help lift up the poor – as well as the rich.

B.Z. Khasru is editor of The Capital Express in New York and author of a bestselling book, “Myths and Facts: Bangladesh Liberation War – How India, U.S., China, and the USSR Shaped the Outcome.” (Rupa & Co., New Delhi, 2010. He can be reached at [email protected])

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