Baby And The Bathwater

AT suburban Vile Parle, where Mumbai's fourth McDonald's outlet is coming up, Vishwa Hindu Parishad and other proponents of swadeshi, the current fad in Indian development economics, are fighting the latest battle against the big, bad multinational corporations (MNCs). Says BJP corporator Parag Alvani: "Bring us technology, that's fine. We don't need MNCs in the food business telling us what we should eat." Other fears: beef burgers, heavy advertising, and American culture. Charges that leave vegetarian Amit Jatia, MD of Hardcastle Restaurants, franchisees for McDonald's, quite dumbfounded. "For every explanation we give, there's a new objection. Tell me how do I convince a sadhu that we're okay?" he asks.

As an overwhelmingly Indian-industry-friendly government takes charge at the Centre, Jatia and his counterparts seem headed for a disturbing and uncertain future. Suddenly, swadeshi seems to be the mantra on every lip. Over 60 per cent of the 1,220 people Outlook-MODE (see pages 54, 55) spoke to in the six metros preferred to buy an Indian product.They also opposed foreigners taking a majority stake in Indian companies or coming in consumer goods. Close to 80 per cent of them wanted Indian industry to be protected against foreigners.

Says Tarun Das, director-general, CII: "Swadeshi means building a stronger India and Indian industry. It doesn't mean closing down MNCs or barring foreign players. Indian industry doesn't want protection from MNC influence. All it wants is fair competition." Agrees Amit Mitra, secretary general, FICCI: "The entire plank of swadeshi is nothing but strengthening of Indian industry, which should have been done at the time of opening up of the economy."

Misplaced priorities: Why are Indians displaying such jingoism? Are we growing xenophobic? Or are we just trying to pick up our wounded pride as we discover that even after 50 years of independence, more than one-third of our population still goes to bed hungry.

The answer is quite simple. India is not on the brink of a Ram Reich. The swadeshi argument is just the direct result of the economic liberalisation of the '90s. More specifically, it's a backlash of the economic slowdown of the past three years. When liberalisation started in the '90s, the country was forced to go in for external liberal-isation rather rapidly without simultaneously providing for matching internal reforms. For instance, import tariffs were rationalised but indirect taxes reform was neglected. Or foreign investment, both direct and portfolio, were allowed in liberally without matching reforms in the financial sector. As a result, the economy became vulnerable to external shocks and other pitfalls of the integrated global economy. Cocooned for 40 years in a highly protective environment, industry found itself suddenly exposed to the financial might of global giants, canny Indian consumers and highly competitive export markets. Result: the protectionist lobbies grew stronger.

According to Jagdish Shettigar, member, BJP national executive committee, swadeshi is nothing but economic nationalism. In other words, putting Indian interests first. Therefore, the demand for keeping consumer goods out of the reach of MNCs, and soliciting foreign investment only in infrastructure, where Indians just don't have the money to invest, and high technology areas, a term considerably alien to us even after 50 years of industrialisation.

But does business stop at national borders? Aren't Philips, Bata and Dettol household names in India? More important, are the MNCs, especially the consumer good giants, really the big bad wolves as they are made out to be? Protests P.M. Sinha, Pepsico chairman: "The colour of the dollar when converted into rupees is no different. So why is everybody fussing about chips and cola?" Asks Ragvinder S. Rekhi, vice-president of McDonald's India: "Our burger buns are made by Cremica Industries of Punjab, the mutton patties are supplied by Al-Kabeer in Mumbai, cheese comes from Baramati in Maharashtra, pickles from Hyderabad and the iceberg lettuce from Ooty, Tamil Nadu and Dehradun. So what's videshi about this?" Adds S.G. Awasthi, MD, Daewoo Motors: "About 70 per cent of the Cielo is indigenised. We are turning India into a major manufacturing base for export of components. Also, we have dealings with over 200 vendors and specific arrangements with 10-12 ancillaries in which we have taken equity stakes."

Soft targets: While MNCs are far from saints or saviours, they may be shouldering the brunt of the blame which should ideally accrue to previous governments. There are three popular charges against MNCs: that they don't meet employment or export obligations despite a smooth sailing with procedures; that they concentrate more on marketing skills than quality, buying marketshares with the strong dollar than fair competition; and repatriate profits but reinvest little. Says Mitra: "Our concern is not so much protection or competition but the power of an MNC to manipulate markets with ease due to their resource base and volume of operations. Indian industry is plagued by high costs—of borrowing, transaction and infrastructure. MNCs can counter all these through their access to cheap funds and ability to take risks. An MNC can take a loss of Rs 100 crore a year easily for a few years just to establish a toehold in the Indian market."

 Agrees Das: "The ultimate beneficiaries of the lifting of the licence-permit raj have been the MNCs. Indian industry still reels under the plethora of rules, licences and regulations. This is what the Bombay Club tried to fight. But it was blacklisted right from birth as an MNC-basher." In sugar, points out CII, importers and foreign companies are allowed to import sugar freely or under OGL and sell the same in the open market. Not so for the domestic producers who are subject to not only backbreaking regulations but also a 40 per cent quota for public distribution system (PDS) sale at negligible subsidy. Similarly, suppliers to refineries can import capital goods freely while domestic manufacturers of the same capital goods, thanks to a slew of indirect taxes, suffer from a 30 per cent cost disadvantage.

Industry also advocates a sector-spe-cific majority stake to MNCs to min-imise chances of unfair or hostile takeover and creating subsequently a monopolistic situation in any industry. For instance, in insurance, where industry is keen to share in the profits so far reaped by the public sector, it wants to keep the MNCs out. Not so in infrastructure, where it realises that short of a majority stake, no MNC would be interested in putting such huge funds at the guillotine. Foreign firms, however, argue that the spectre of MNCs coming in only to make a quick buck is at best notional. Says Pepsico's Sinha: "We are in a capital-intensive long-haul business where even if profits come in, you have to put it back in business-building. In agriculture, it takes five to six years to establish backward linkages and acquire the trust of the farmer. Till date we haven't repatriated anything by way of royalty, knowhow or dividends. " Pepsico also claims to have created 45,000 jobs and increased export turnover 20 times in seven years. One-and-a-half-year-old McDonald's India claims it already provides employment to 600 people.

High on technology or funds?: In fact, the swadeshi line of divide between consumer goods and high-technology areas is a figment of the imagination. This is especially true of food processing and auto industries, the nationalist lobby's favourite whipping boys. These are the sectors which have brought in huge funds in the past few years. Secondly, when India decides to offer majority stake to MNCs in infrastructure, the decisive factor here is funds, not technology. India welcomed MNCs into food processing because it had hopes of becoming a food superpower. With one-third of its produce wasted every year for poor distribution and storage facilities, the potential was great. But India was processing only one per cent of the food, compared to 70 per cent in the US, Brazil or the Philippines. To raise it to even 15 per cent, according to a Mckinsey report, would require an investment of $3-6 billion every year. Also, since the industry is highly labour- and technology-intensive, inviting MNCs was expected to ensure prosperity of the farm economy.

IT was the same in automobiles. In many developed countries, notably the US, UK, Germany, Japan and South Korea (which started as a component supplier to Japanese industries), auto industries have been the engine of domestic and export-led growth. Says Awasthi: "Technology is not about machines, equipment and hardware. Its basic purpose is to improve products and services. In that sense even managerial techniques and knowledge inputs that deliver better products to the consumer are also a component of technology."

More important, however, is whether foreign investment will automatically come in wherever the government wants it to. In 1997, close to $350 billion of FDI flowed worldwide, 35 per cent of which came to developing countries. India got less than one per cent or $3.1 billion, according to the World Bank Global Development Finance (GDF) Report, 1998. In comparison, China, which opened up its economy in 1979, got over 10 times more or $37 billion. On the positive side, 1997 was also the year when India inched up to the list of top ten recipients of FDI among developing economies. If there's progress despite our inefficient approval system and the disorganised tying up of projects, a change in the direction of the present FDI policy can send very alarming signals.

How important is FDI?: The recent East Asian debacle has added fuel to the nationalist lobby's arsenal against FDI. That's wrong.Private capital flows to most of these countries, except for Malaysia, were overwhelmingly in the form of volatile portfolio investment and loans, not FDI, which is money that goes into building factories and creating jobs. Empirical studies clearly show a strong positive correlation between a country's GDP growth and FDI inflows into that country. According to the GDF, over 1993-96, China recorded a real GDP growth of about 12 per cent, even as FDI accounted for about seven per cent of its GDP. Vietnam had corresponding figures of about 9 and 10 per cent. Conversely, Pakistan, Argentina and Brazil were at the bottom of the tables. Further, GDF points out, trade expansion and export orientation promote FDI flows.

In fact, the lesson to draw from the East Asian experience is that for a developing economy, strengthening the financial system should go hand in hand with, if not precede, a complete freeing of capital flows. China is believed to be already going slow in making its currency fully convertible. In India anyway, official thinking pre- and post-BJP government, definitely precludes full convertibility of the rupee in the next five years.

In going all out to protect Indian industry, the government is ignoring a few home truths. One, MNCs are a patient lot; they have long-term interests at heart for which they are willing to sacrifice a few years' time and losses. Also, there are many countries where foreign investors cannot be sure of being treated reasonably or fairly. In most developing countries, foreign investment policies tend to yo-yo. In China, foreign investors are still not allowed a majority stake in companies. And they are unlikely to be unduly ruffled by India's decision to shutter fast foods and soft drinks, as long as they are assured of reasonable economic returns in the infrastructure sectors. Secondly, most charges against MNCs have basically to do with proper regulations. One of the long-standing criticisms against the Indian liberalisation process is that it has severely neglected administrative and legal reforms. To protect Indian industry against hostile takeovers or pre-emption of market shares, one only needs to tighten the MRTP laws or anti-dumping measures. To throw out the MNCs and put up tariff or non-tariff barriers again to protect unprofessional, weak industry houses or inadequate legislation would be asking to throw the baby out with the bathwater.

What about the consumer?: But, the billion-dollar questions in the swadeshi-videshi debate: is industry's interests the same as its consumers'? Shouldn't good governments first protect the interests of the consumers? And won't protectionism create a more inefficient and inward-looking industry as it did in the '70s? For instance, when Japanese cars captured almost a third of the US market, the US protectionist lobbies predicted the death of the American car. What actually happened was that Detroit, the hub of car industry, was forced to improve its quality and cost control to ultimately recapture its share.

Asks Shubhasis Gangopadhyay, professor, Indian Statistical Institute: "The final decision as to which product is useful for the economy rests with the consumer. By accepting or rejecting the product made by the MNC or an Indian company, he exercises that choice." By closing the gates to competition from better, and sometimes even cheaper, foreign products, the government is denying the consumer that choice. This is akin to what India had in the '60s and the '70s, a throwback to the planned economy. It could end up looking uncomfortably like millions of average Indians subsidising incompetence and sloth of a few hundred Indian industrialists.

From the average Indian's point of view, the government can do its bit to protect industry as long as the consumer continues to get what it wants. As MNCs and Indian industry have both learned to their cost, the Indian consumer, like the voter, is no fool. Any exercise in denying him his right to choose, even under the ruse of swadeshi, can boomerang on Indian industry itself. As Jatia said: "Why are we singled out when in Vile Parle, there are liquor bars for women next to the Jain temple?" The swadeshiwallahs would do well to remember that even months after McDonald's entry, Nirula's, Delhi's homegrown fast food chain, or the roadside five-rupee burger vendors continue to do roaring business. Some would say: better than McDonald's.