Cola, Chips And Pop-Con?

A lot of the economic policy timber of the BJP may be just bark. For evidence, look atthe gradual transformation of the party’s economic thoughts from the strongstatements by coalition members to the draft national agenda or the common minimumprogramme.

As it inches closer to power, the BJP is going through a pragmaticchange of heart. The party’s common programme has not only put the mandir and theuniform civil code on the backburner, but the rabid anti-foreigner stance is slowly givingway to a mild protest against multinational corporations in soft drinks and potato chips.Even the irrepressible George Fernandes of the Samata Party has since modified his tiradeagainst the Cola companies of the world, explaining that those that are already herecannot obviously be asked to leave. Even hardliners like Murli Manohar Joshi, who hadadvocated candles vs Enron a couple of years ago, has been defending his stance on theplea of protecting domestic industry.

Explains senior BJP member and cabinet hopeful Yashwant Sinha:"There’ll certainly be a directional shift in reforms and the foreign directinvestment (FDI) policy. We’ll look at the list of areas open to FDI at present andmake changes where necessary. All our policy shifts will come in the budget. Everythingwill be clearly defined. This is nothing that India should be ashamed of. Many countrieshave similar restrictions. But let’s not scare the foreign investors more."

For all its protest against the economic reforms which began in thisdecade, the changes proposed by the BJP cannot be detrimental to the country’slong-term interests except in one area: mollycoddling domestic industr y. Let’s lookat the three main planks of the BJP’s economic policy, namely government spending,infrastructure and swadeshi.

A return to government: The BJP’s argument that previous governments haveneglected infrastructure investment is not new. The fiscal deficit, that crossed 6 percent during Manmohan Singh’s time and could be reined in by P. Chidambaram only bytightening the screws on government departmental expenditure, forced the financeministry’s hand. Even as reforms were expected to lead to an industrial expansion,even as foreign capital was being wooed, capital expenditures in energy, communicationsand ports were cut mercilessly. The much-needed social sector investment in education andhealth was neglected. Since foreign investment did not come in at the rate expected, aftera time lag, infrastructure strained at the seams and industrial demand shrank. It was asituation most industrialists and leading economists had predicted.

There can thus be no dispute over the BJP’s goal of a "jumpstartinvestment" by the government to set the economy rolling, never mind the seriousdoubts about the source of investment in the backdrop of a year which will see one of theworst growths in recent history. Nor will anyone disagree with the need for cutting outall the red tape that ties up even the simplest foreign investment proposal in knots andultimately ends up jeopardising even our foreign trade. Says Sinha: "The foreigninvestor doesn’t want to come in due to the hassle factor, for being shunted fromministries to departments. If you have a transparent regime of time-bound clearances,investments will come. But if you have a fast-track project that is not cleared in sevenyears, that’s the worst publicity the country can get. "

To counter this, the BJP is proposing setting up semi-autonomous bodies and vestingthem with powers similar to what the RBI has in terms of automatic FDI clearance. Thesewould be the final and only authority for approvals and will clearly lay down rules andpenalties for violations. There will just be a system of registration and no furtherapprovals will be required, says Sinha. In fact, even if the BJP is successful in speedingup all the legislative changes that are awaiting clearance, it will have achieved a greatdeal. Especially since it has eschewed con-frontational politics and promises to try andbuild a consensus on the direction and sequencing of economic reforms.

But it is the policy of swadeshi, or economic nationalism, the crux ofthe BJP’s growth formula for the economy, that needs to be handled with great care.In its current avatar, it is no different from the agenda of FICCI or CII, the leadingindustry chambers which are the spokespersons for the protectionist lobby of Indianindustry. Over the past few years, probably because deregulation has started to hurt,these clubs have been demanding non-tariff barriers in industries as diverse as chemicalsand petrochemicals, steel, paper, drugs and cement, even anti-dumping duties.

Competition policy:Justifying industry’s cry-wolf attitude, Sinhasays: "Swadeshi means competition with clearly defi-ned rules. The BJP has alwaysbeen in favour of internal liberalisation. That is, an end to the licence-permit-quotaraj, cutting bureaucracy and replacing government control by self-control or autonomousregulatory bodies." Adds Fernandes: "It is not being anti-MNC but pro-swadeshi.India has to be built by Indians." According to the BJP, wher e the reforms wentwrong is in throwing open the country to foreign investors without real-ising that Indianentrepreneurs, used to setting up a factory merely because a licence was available forsome reason, were not in a position to survive the competition. In such a situation, theforeign firms, with their immense money power and trade leverages, found themselvescomfortably placed to swamp the marketplace, sway the consumer and eventually edge out thelocal player. Says Sinha: "The Japanese car industry was first developed at home. Ifwe want our industry to compete with world-class products on Indian soil by loweringtariffs, we owe it to them to give them world-class infrastructure and interest rates andprocedures that are comparable with the rest of the world. We have chained their feet andtold them to swim."

Therefore, what the new government plans to do is to carry internalliberalisation forward, by creating a competitive environment at home within a timeframeand doing away with monopoly or duopoly. Logically, for the five years or so needed byindustry to acquire the skill, multinationals have to be kept out of those areas whereIndian industry can manage on its own. And they will be invited openly in big projectslike power or ports or highways where neither the private sector nor the government canafford to enter.

More jhanda than nationalism:There are three economic flaws in theswadeshi argument, apart from the fact that it lulls Indians into a false sense ofsecurity vis-a-vis global competition. One, how is a domestic company different from aforeign one as a corporate entity? If an MNC comes to India, sets up a manufacturingplant, hires Indian talent, uses Indian raw materials, imports raw materials into Indiaand exports from India, the only way it’s different from an Indian company is that itrepatriates abroad. But don’t Indian industrialists take money out? Secondly, howmany Indian groups are famous for reinvestment of profits? Says Jairam Ramesh, jointsecretary, Congress party: "It’s a far greater crime for domestic industrialiststo stash money abroad than for foreign companies to take it out through the legal route ofdividends." Two, in terms of value addition, it is unfair to distinguish betweenproducts, even microchips and potato chips. Despite the proliferation of computercompanies, India exports more computer personnel than computers. How can we undermine thevalue of that export? Ramesh’s favourite example is the chips controversy. "One,potato chips generate seven times more employment than computer chips. Two, computercompanies generate a certain level of skilled employment, less suited to the needs of adeveloping country. Three, potato chips help in backward integration into agriculturalproduce. It also adds value to the sectoral output. West Bengal, for instance, is thesecond biggest producer of potatoes in the country, but adds little value by makingbyproducts."

Three, swadeshi is also a self-defeating argument. If Indian industry isonly allowed to produce things which are easy to manufacture and keep out ofhigh-technology areas or export production, they will never acquire the skill to fight itout in the global arena. Nor will they invest in research and development to improveproduct quality or portfolio and raise market shares. Along with FDI comes experience,technology and a whole lot of marketing and export possibilities in a third country.

The BJP would also do well to remember that in 1997-98, FDI flow isexpected to be $4 billion, $3 billion more than the volatile net inflows through foreigninstitutional investors (FIIs) in the year. True, FII inflows have suffered because of thedepressed capital markets and seesaws in the rupee due to the Asian currency crisis, butFDI is on any day a better bet to acquire worthwhile reserves than floating dollars.That’s also one of the reasons for the rupee’s comparative stability. And aconfused FDI policy may well put pressure on the exchange rate considering that the partyhas ruled out capital convertibility in the next five years and vowed to keep the rupeeunder strong reins.

But, for all its grand talk, the party may well find it difficult todictate terms to the foreign investor once it forms the government. That’s clear fromthe fact that it has already climbed down on the WTO, except in the case of theMultilateral Agreement on Investment (MAI). Protests Sinha: "It’s been a longhistory of surrender in the WTO. Like the MAI, where our interests are not served. Thereis free movement of capital, but not of labour. Why should there be linkages, conditionslike good governance? We have to find the loopholes and fight every case as itcomes."

Where the BJP scores is in trying to recognise a bhagidari sector. Roughlytranslated, it means the small and tiny sector, including the huge unorganised sectoroffering both goods and services. In coming years, its size will only increase if thereforms are well-directed. With jobs scarce, a government that propels more and morepeople towards self-employment should be commended. The question is: will theencouragement take the form of subsidised loan schemes or should it take the form ofensuring a huge free and fair market with equal opportunities for big and small players?That’s the ultimate aim of all deregulation. The success of the BJP’s biggestvotaries will also be a triumph of its still-largely-nebulous economic policies.