Political expediency?

The decisions on FDI were long awaited and needed for continuing the reforms, but the timing and the intent are not right.

The Central government has suddenly loosened the restrictions on foreign direct investment (FDI) in several sectors including retail and civil aviation.

For a government that was dithering for several years to take even one of those steps, this move is quite surprising. One cannot be faulted if the move is seen as one taken more out of political expediency than national economic prudence.

The UPA government was tied in all directions by the revelations of various alleged scams of increasingly colossal proportions one after the other – the Commonwealth Games, 2G spectrum and now the coal block allocations.

Mounting evidence brought the fire of the public resentment distressingly close. Opposition made it impossible for Parliament to function with their protests. On top of it, the derision seemed to have reached the international quarters and the prime minister was riled at the negative publicity. The ‘gheraoed’ UPA government, boxed in from all directions, has now tried to leap out of the situation by unleashing a slew of FDI related reforms.

These are indeed ‘reforms’ as Indians have understood of late. Long awaited and needed for continuing in the direction in which the nation’s economy was moving during the past two decades post-1991. However, the timing and, more importantly, the intent of it all is not right. FDI in multi-brand retail was being hotly contested by the opposition and also the main constituents of the UPA for a few years now. Similarly, the FDI in civil aviation also has been running into rough weather.

The reason and intent behind the government’s hurried step has been political expediency – a need to create a smoke-screen around the series of mega-scams -- rather than genuine economics. Thus, the government’s own motivation to implement the so-called reforms is in doubt; leave alone the disagreement of the opposition. With little motivation, the FDI ‘reforms’ would find wanting in several essential support structures needed for these reforms to be carried through. Declaring a policy is one thing and giving it a material shape is another. Prognosis of a weak will is weak execution.

A weak government trying to escape could make the opposition and the dissenting coalition members all the more dogged to see that the reforms process fails. Sans the real resolve would the government have the strength to carry the new FDI policies through? There are several states governed by the BJP and the UPA’s ‘allies’ like Trinamool Congress and Samajwadi Party. These would oppose FDI in retail and other categories in their respective states.

For the foreign investors to invest the mere presence of a liberal policy is not enough. The political environment also has to be right. They need to feel reassured that what the Government of India says it implements. With a strong resistance to FDI initiatives like the nation-wide bandh, it is less likely that a foreign investor will entertain thoughts of investing in Indian economy in a significant measure.

Mammoth scandals

In addition to the political inferno, what we have are the mammoth corruption scandals. Would a forward-looking businessman go gung-ho investing in such a country? Such scandals could hit all – the corrupt and the non-corrupt. Moreover, the coalgate and the 2G issue have now resulted in the termination of many licences.

Many foreign investors have lost out because of these incidents. The GAAR issue regarding taxation also resulted in uncertainty about the government decisions. The picture we are sending out is that of a corrupt country with a government that will say something today and will likely reverse the same thing the next day. The present reverse jump, in the FDI policy, may possibly add to this perception of uncertainty of Government of India’s decisions bordering on eccentricity. Flip flop in major policy decisions is likely to produce flops.

It is possible that the government that has been scorned in the west – particularly the USA – for its inability to open its lucrative sectors like insurance, aviation and retail -- was  under pressure for a long time from the western governments to open up opportunities for their business to invest in the Indian economy. The current expeditious move has a parallel in the same prime minister’s move a few years ago to sign the nuclear deal with the US. That has not been exactly a success story.

Foreign governments cannot be expected to understand the Indian political, social and economic reality. Therefore, while the FDIs in several sectors might be in line with the direction of the ‘growth’ of the economy, the results will not be as desired because of the glitches in implementation. Moreover, the foreign businessman is unlikely to jump at any and every loosening of FDI limits; it is not a Pavlovian response like the Indian government assumes.

The policy decisions of 2012 are not similar to those of 1991 when the economic liberalisation policies first came into existence. P V Narasimha Rao launched the pioneering changes without acrimony from the opposition. Everyone agreed more or less that the country had no other go than to tread the path of economic liberalisation. There was unanimity on this issue, although there were other contentious incidents like the demolition of the Babri Masjid.

For the foreign investor, India was a green field. Even so, it took ten years before some effects of the continued efforts at increasing liberalisation could be felt. The NDA government, which took over the reigns from its opponents, also continued in the same direction of economic decisions. Whereas in 2012 we are witnessing political turmoil, disempowered bureaucracy, disillusioned citizens and confused investors. UPA’s last ditch political tricks at playing with FDI are less likely to meet with success.

(The writer is a former professor at IIM, Bangalore)