Rediff On The Net Business News: An examination of the Swadeshi versus Videshi controversy


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February 16, 1997

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The uncertainty over the Tata-SIA airline is the latest episode in the long-running Swadeshi versus Videshi drama. Anindya Sen, Subrata Sarkar and Rajendra R Vaidya examine the economic evidence and ask if foreign investment poses a threat to Indian economic sovereignty.

FDI Proposals Received by Major States

                         (August 1991-May 1996)                           
State                    Numbers              Amount (Rs million)       

Delhi                    365                       162,184.4                

Maharashtra              667                       105,467.2                

West Bengal              137                       42,272.1                 

Tamil Nadu               421                       36,989.3                 

Gujarat                  202                       28,512.9                 

Karnataka                330                       28,283.4                 

All India                4679                      715,582.3

Source: CMIE

Since a number of states are trying to attract FDI in an uncoordinated manner, there is a possibility that they might compete among themselves for the same projects and thus provide so very large incentives to the foreign firms as to wipe out the net gain to the state from the firm's operations.

In order to outbid Maharashtra for the Mahindra-Ford automobile plant, the government of Tamil Nadu gave the promoting company a cost of concessions including a waiver of approximately Rs 3 billion in sales tax per year for 14 years.

Till April 1996, 165 proposals had been received by the FIPB for hiking the shareholding of the foreign partner in a joint-venture. Of these, about 100 applications were for increasing the shareholding to or beyond 75%. For 65 applications the request was for increasing the shareholding to 51%.

To summarise: The total amount of FDI received by India is still very small by global standards. The proportion of FDI to total capital inflows has been increasing, as also the proportion of actuals to approvals. But there is still a big gap between approvals and actuals.

While most of the approvals are for investment in the core sectors, the proportion of actuals going into consumer goods industries is quite high. The number of proposals for increasing the shareholding of the foreign partner in a JV is still quite small in terms of the total number of JVs entered into.

Much of the FDI occurs via MNCs. The sheer economic power and the high visibility enjoyed by the MNCs seem to arouse strong emotions. Supporters of MNCs feel that investment by them can realise all the potential gains from FDI. On the other hand, critics level a number of charges against the operations of MNCs. Some of these are specific to the MNCs, but others might equally well be levelled against large domestic firms. We enumerate these criticisms below.

MNCs may lower domestic savings and investment by stifling competition, by not reinvesting their profits and by generating incomes for groups with lower propensities to save and higher propensities to import. Moreover by importing intermediates from international affiliates rather than buying from indigenous firms, MNCs inhibit the growth of local firms.

Substantial importation of intermediate and capital goods, and repatriation of profits, interest management fees etc. Will reduce foreign exchange earnings in the longer run.

The liberal tax concessions, investment allowances, disguised public subsidies and tariff protection provided by the host country to the MNCs will add to budgetary problems.

MNCs may exacerbate income inequalities in a number of ways -- by promoting the interests of a small group of well-paid organised workers, by diverting resources away from food production to the manufacture of sophisticated products to satisfy the demand of local elites, etc.

They can bring in 'inappropriate' products and technology, thus stimulating 'inappropriate' consumption patterns and leading to the use of inappropriate technologies.

Management skills and overseas contacts provided by MNCs may have little impact on local enterprise.

Finally, transfer prices used by MNCs in intra-firm transactions allow opportunities for under or over-invoicing, and can be used to avoid paying taxes or shift profits for tax purposes.

A number of these criticisms can be equally valid when applied to the operations of domestic firms. Domestic firms can also rely on imports to meet their need for intermediates. Again, as the ITC case shows, reduction in foreign exchange inflows can be achieved by domestic firms too by under invoicing exports. Subsidies and incentives provided to domestic firms can create budgetary problems, especially in the public sector.

Moreover, in public sector firms like banks with strong trade unions, the resources of the society effectively are used to benefit a relatively small section of population, leading to undesirable distribution of income and wealth.

A rather shocking instance of such income distribution is the proposed move to sell shares of public sector undertakings (which often depend on their monopoly position in the market for superior performance rather than efficient working) at a discount to the workers of such undertakings.

Excerpted from India Development Report, Edited by Kirti S Parikh, Indira Gandhi Institute of Development Research, Oxford University Press, 1997, Rs 265, with the publisher's permission.

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