Inder Kumar Gujral was always out, calling on Africa, Europe, wherever as prime minister. Jyoti Basu makes annual trips abroad. Laloo Prasad Yadav spent weeks in the US in better times. Politicians travel abroad to lure foreign investment. They return, and bash foreign investors inside out in speeches. Suddenly they discover it is Indian industry they want to court after all, and devise a peculiar two-sector model of the Indian economy where foreign investors will be allowed into core sectors, and will not be tolerated in non-core sectors. When fleshing out this policy, the government will have to consider the following. First, the concept of `allowing' foreign firms to invest does not arise when foreign investment never made a proper exit since the colonial period. Indian company law has always allowed it. Even the Foreign Exchange Regulation Act, 1973, widely regarded as draconian, did not insist upon total liquidation of foreign ownership. Especially between 1991-1997, India has received huge directforeign investment inflows, pushing up foreign stake in companies incorporated in India to between 50 and 100 per cent.These FIs also have to be placed in perspective by any government that follows. Will investments made in home appliances, white goods, soaps and detergents, cold beverages etc be considered unnecessary? Second, the record of foreign investors in India has been good. The companies have not behaved, through the post-1947 years, in some destructive or exploitative fashion beyond all powers of Indian regulatory authorities.
True, consumer goods multinationals have grown to huge proportions. But while pondering on the monopolistic aspects of that growth, the government will have to bear in mind the tremendous market-penetration achieved by these companies, which obviously has had positive effects on general hygiene and personal care standards. The government will also have to note that these companies have developed common management and technology pools with their foreign parents, withfrequent exchanges of personnel that have taken management standards forward, not backward. Third, it is clear after the tremendous impact on western capital markets of the recent SE Asian crisis that foreign investment in emerging markets (such as India) is not a one-way cash flow. One-sixth of the 157 point fall in the Footsie (the Financial Times stock market index) on October 25 last year, when Hong Kong showed the first signs of fallibility, was owing to declines in three stocks with large exposures in Hong Kong: Standard Chartered Bank, HSBC and Cable & Wireless. Foreign investors, in other words, have developed a stake in the well-being of emerging markets, because, as of 1996, they held $366 billion in private emerging market equity.
In fact, the whole issue of foreign investment in India is interlinked with a new phase in world history. During the late 19th century, rapidly developing western economies experienced tremendous fluctuations in growth and prices which were transmitted easily throughopen trade links from one market to the other. A century, two world wars, and one cold war later, the western economies have reached a mature stage of high growth, low unemployment and low inflation. Ironically, through investments in a whole new set of rapidly developing and therefore fluctuating emerging markets, the western economies are once again being exposed to turmoil. Therefore, foreign investment flows will be tempered by the fear of that turmoil, and selectivity of western economies as to which system is the least likely to shake up their mature, balanced economies.
The effort is on worldwide to minimise fluctuation through uniformity in externalities, such as company law, judicial practice, financial market norms and practices (the World Trade Organisation treats these subjects at an international level, but there is no doubt that uniformity across nations is essential to ensure proper international harmonisation). Reasonably similar and interlinked financial markets are making sure that thereis a growing demand for a roughly similar range of assets across countries, and that growing globalisation is, in the ultimate analysis, making for more exacting specialisation than ever before.
India can not hope to remain outside this process, because it is being inextricably drawn into it by market as well as non-market forces such as the WTO. The next government has the worrying task of harmonising Indian growth and interests with the dynamics of this global process. To do so, it has to develop a policy on foreign investment that does not treat the interests of foreign and Indian investors as mutually exclusive. Of course, in the first place, it has to look beyond the currently thriving market in parliamentary seats.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
