The BJP manifestoThe BJP's economic agenda is based on a model of development followed by many late developing countries, Japan and South Korea being recent examples. The model envisages a very close connection between the government, on the one hand, and the private sector, on the other, best illustrated by the relationship between the chaebols and the South Korean government.
The mantra is economic nationalism -- but an economic nationalism with full internal liberalisation.
But it may not be very illuminating to compare the Japanese and Korean model with India. The former are export-oriented economies -- with the result that competing in foreign markets has led to efficiencies being internalised, and costs kept firmly in leash. If protection is indiscriminately extended to all companies, without pressure to export, Indian industry could fall back in terms of technology and costs. Monitoring competitiveness by the government, and taking corrective action, is therefore absolutely necessary. Itis also necessary to ensure that companies cannot successfully lobby for continued protection without achieving efficiencies.
Industry to get 7-10 years to integrate with the rest of the worldThis measure addresses one of the chief concerns of Indian business. The "big bang" liberalisation of 1991 left Indian industry exposed to global competition, and one of the chief reasons for the current slowdown in the economy and the low level of business confidence is the effect of foreign competition on domestic companies.
The consumer goods industry, where imports are on the negative list, will be the main beneficiary. The BJP says that the measures have prospective effect, but it is not clear whether there will be a rollback of tariff reductions. Indian industry is already reeling under the pressure of imports at current tariff levels, and while the stopping of further reductions would be welcomed, large parts of industry, for example the capital goods sector, can only be safeguarded if higher import tariffsare imposed. Chemicals, bulk drugs, steel are the other industries which will get a breathing space by this policy.
While the short-term effects of this policy will be to protect the profitability of import-substituting industries, the long-term effects may be pernicious. For example, if import tariffs remain high and demand for copper increases, domestic copper capacity will come up to cater to local demand, given high tariff protection. But the local copper prices may be out of line with international prices, and India may not have any comparative advantage in copper production. In that case, protection will skew the distribution of resources into activities unsustainable when the economy opens up. To prevent that from happening, the government will have to monitor prices closely, and this seems to be the BJP's intention, judging by its pronouncements on having a MITI-style ministry to map out and monitor industrial policy.
FDI only in priority areas
This will also help domestic industry facecompetition from FDI. FDI will be allowed in manufacturing for exports, in infrastructure and in high-tech industries. Limiting the scope of FDI will result in lower foreign investment than would otherwise flow in the absence of such restrictions.
In the short-term FDI and imports have very different consequences. While imports can threaten domestic jobs -- hence the support of protectionist legislation by American workers -- FDI adds to jobs. It may also not make much sense to draw a fine line between FDI strictly for exports and FDI for the domestic market. Many companies would wish to export only if they are also allowed access to the lucrative domestic market.
But the BJP feels rightly that the bulk of savings for growth has to be raised internally. Even the Southeast Asian nations have developed in precisely this manner, while at the same time being relatively open economies. On the other hand, China has welcomed FDI without having any qualms about investment in non-priority sectors, and Coca Cola,MacDonalds and P&G have all been made welcome.
Stopping takeovers of local companies by foreigners also addresses the fears of domestic entrepreneurs, fears brought out when ICI bought out Choksey's stake in Asian Paints. The argument is that foreign players have the money power to buy out Indian promoters, and the BJP's stand on hostile foreign takeovers is complementary to its stand on FDI and protection to Indian industry. But while Asian Paints is a well-managed company,that does not hold true for a large section of Indian industry -- takeovers in this area may actually promote efficiency.
The stand on preventing 100 per cent subsidiaries of foreign companies coming in will benefit Indian investors, since many foreign companies, particularly the foreign pharmaceutical companies, are slowly shifting most of their profitable products to the subsidiary, leaving Indian investors in joint ventures in the lurch. However, one negative effect, so far as the pharma companies are concerned, is that the entry ofnew drugs into the country may be delayed.
Insurance
Opening up the insurance sector to private industry will fulfil two purposes -- one, it will introduce efficiencies within the insurance industry, and two, it will provide the long-term funds for infrastructure development. A by-product will be the development of the capital markets.
While foreign players will certainly bring in their expertise and initial capital, the fact remains that the insurance premiums will be raised from the local population, and it is local money which the foreign insurers will be managing.
Internal liberalisation
The BJP's internal liberalisation aim is commendable, but the policy on protection of the small scale sector seems to be at odds with that aim. Protecting the small scale sector will not help create jobs. Rather, the objective should be to ensure that new ventures come up as fast as older, unviable ones close down. Besides any disproportionate incentives to the small scale sector is a disincentiveto growth.
The objectives of a smaller government and government disinvestment in non-strategic industries will serve internal liberalisation. The transformation of DoT into a company will help level the playing field for the other telecom players.
Implementation
Economic growth is essentially a matter of foregoing consumption and increasing savings. For a poverty-stricken country like India, raising itself up by the bootstraps is not easy. Lowering government dissaving by privatisation is one option to increase the savings avaiable for investment.
But foreign direct investment helps ease some of the pain. Moreover, FDI helps increase the economic clout of a country -- witness China's ability to enter the WTO on its own terms, mainly because of the huge amount of FDI locked up within its borders. Once the FDI is in, foreign companies in the country will lobby with their own governments in pursuing India-friendly policies. This kind of economic clout is a far more attractive proposition thanbuilding up nuclear capability.
Another fact is that, if consumption is to be foregone, the state has to be strong enough to force what may be a temporarily unpalatable solution. This was done by the state in Soviet Russia, where under Stalin growth rates were above 20 per cent, and in Korea or Southeast Asia, where the trade unions were ruthlessly put down. In China, in the coastal regions, there are no labour laws at all, and sweatshop conditions exist. How will the BJP implement this programme in India, particularly when it controls one of the largest trade unions? So long as India remains a soft state, even raising the necessary taxes to fund growth will be a problem.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
