Foreign Money, Indian benefit
It is an opportune moment for policymakers to change their mindset and relentlessly use foreign money for India’s benefit just as the reverse occurred during British colonial rule
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For decades India shunned foreign investment. Scarred by colonialism, prime minister after prime minister barred a significant Western role in the economy.
Jawaharlal Nehru recognised at independence that Britain had left India with inadequate infrastructure, a rudimentary industrial base and low literacy. The nation had an economic and social mountain to climb. His solution was to follow the Soviet model of a centrally planned economy.
Some of this was justified. Few in the private sector, bar the Tatas and Birlas, had the capacity at Independence to build large industrial plants. Hence Nehru’s relentless focus on the public sector – SAIL, BHEL, HAL – as well as on publicly funded IITs and IIMs.
But by 1966, when his daughter Indira Gandhi took office as prime minister, the Soviet model had clearly run its course. While the rest of Asia embraced free markets, Indira sought refuge in populist socialism. She nationalised banks, raised taxes to over 90 per cent and closed the economy even further to foreign investment.
The liberalized, privatized economies of Asian “tigers” like Singapore, South Korea, Malaysia and Thailand grew at an average of over eight per cent a year during this period while India’s economy crawled at the Nehruvian (wrongly dubbed “Hindu”) growth rate of three per cent.
In the process India lost an entire generation to a socialist, low-growth economy. Had India grown at the rate of the rest of Asia between 1966 and 1984, its GDP and per capita income would have been double today’s and poverty significantly lower. (The annual growth rate differential of five per cent over 18 years, when compounded, is more than 100 per cent.)
Fast forward to the present. In the first term of the UPA government, solid economic policies led to near-eight per cent GDP growth. Inexplicably, in UPA-2, from 2009 to 2014, the Manmohan Singh government backtracked on economic reforms, catering again to Indira Gandhi’s povertarian economies. Growth slowed, due partly to emerging financial scams in telecom spectrum and coal, as well as the post-2008 global economic recession.
The Narendra Modi government offered a whiff of hope in May 2014. His Gujarat model was an economic, if not entirely a social, success. Yet after nearly two years in office, Modi’s liberalization impetus has not gathered the momentum it should have. The responsibility for this must be shared between the prime minister and his finance minister, Arun Jaitley, who has delivered three uninspiring Budgets.
Despite this, there are bright spots in the economy. Foreign direct investment (FDI) is up year-on-year. Net FII inflows in March 2016 (up to March 28) hit a record $2.74 billion. This is a sharp recovery after several months of net outflows due to worries leading up to the US Federal Reserve’s December 2015 interest rate cut.
For two centuries the British used Indian money and labour for their benefit. Nehru was right in initially following a centrally planned economic model to build India’s economy, denuded by decades of rapacious foreign exploitation.
But his successors, especially Indira Gandhi, did great economic damage by not liberalizing the economy 25 years earlier, in 1966. They eventually did so in 1991. It is a burden India still carries.
However, with India now emerging as the world’s fastest-growing large economy, it is an opportune moment for policymakers to change their mindset and relentlessly use foreign money for India’s benefit just as the reverse occurred during British colonial rule.
On March 29, 2016, the government finally bit the bullet. It allowed 100 per cent FDI in e-commerce marketplaces like Amazon, Flipkart, Snapdeal, Paytm and ShopClues. There are minor conditions attached but overall e-commerce retailers can now hope to achieve global scale and investment.
Foreign direct investment (FDI) in infrastructure is especially vital. Roads, railways, bridges, waterways, airports, factories, sea terminals, housing – let foreign money pour in, whether through debt (at historically low rates) or equity.
India’s leaders let India’s poor down for decades. They have finally recognised that only when the economic pie grows bigger can it be distributed more widely and fairly to reduce poverty. To achieve that the prime minister has two more years to recharge – and reorder – the economy.
The fifth year of his term will be hostage to electoral populism as the Lok Sabha election of 2019 bears down on him. The time to act is now.