Inviting trouble

There is a story in Panchatantra about the rivalry between two frogs in a well who were the leaders of their respective clans. The well was full of frogs of these two types. One of the clan’s leader ruled the well at that time. The ruling frog was tired of the constant trouble given by the leader frog of the other clan. There was large snake on a tree near the well. The ruling frog thought if he invites that snake to come and stay in the well, the trouble from the nit-picking clan will stop. So, he invited and the snake started living in the well. Initially, the snake ate only the frogs of the opposite camp. But, once the number of frogs reduced, he began swallowing up even the frogs of the ruling frog’s clan. One day he threatened the ruler frog that if some more frogs were not supplied soon, he would not hesitate to eat up the ruler frog himself.

UPA government’s recent FDI push in throwing open certain sectors like defence and insurance is similar to the above ruler frog’s decision. Understandably, the present government is in a hurry to make an impact before the 2014 elections, to steal the thunder from the perceived advance of the BJP under the leadership of Narendra Modi who is being projected by his party as an ideal choice for bringing about an economic transformation in this country. Therefore, prime minister Manmohan Singh’s government has opened up FDI in several different sectors at one go. The FDI limit in defence has been raised to 49 per cent and same is the story in insurance.

Some analysts, particularly the captains of our industry, who – instead of innovating, developing new products and services, making operations a lot more efficient and improving quality radically – look to the west for succour, say that ‘too little is done too late’. However, the relevant question to be asked would be: Is it necessary at all to invite FDI in all kinds of sectors of the economy?

With the FDI cap in defence having been raised to 49 per cent on a case-by-case basis, it is an invitation for the large American defence companies like Lockheed Martin Corporation, General Dynamics Corporation and Northrop Grumman etc to set up shop in India. These companies might do so. Given the huge defence outlays we have in our country – as a product of our confused foreign policy -- it is attractive pickings. We do not know who and why we are fighting. Today it is snubbing Bhutan, yesterday it was Nepal, sometimes it is Myanmar, and always it is Pakistan, sometimes Bangladesh, flip-flop with Sri Lanka and perennial fear about China. We are continually at loggerheads with our neighbours for no gain.

Vested interest

So, we need better aircraft, better guns, and better and more ships and so on. Now when these global companies producing weaponry set up their shops in India so that our every need for weapons can be met, we are inviting people who will have a vested interest in our being in a constant state of quarrel with our neighbours. More we bicker, more they prosper. Pray, in what way is it going to help Indian economy? In fact, it has immense possibilities of our getting sucked into a more destructive path. Is this the kind of FDI that we need?

Then there is the sharp increase in the FDI limits in insurance. This could be an interesting business strategy for the Americans and other countries of the west to sell spurious insurance and financial products in Indian market and suck up funds from here. They would not bring funds. They will take away funds. India government – rather the UPA government – is under an illusion, if it thinks otherwise. Why doesn’t our present government listen to the recommendations of the parliamentary standing committee on Finance, which says, “Increased role of foreign capital may lead to the possibility of exposing the economy to the vulnerabilities of the global market by way of likely inheritance of unsound balance sheets and financial health of the foreign partners through joint ventures and subsidiary routes.”

The western nations, starting with the US have suffered a grave financial crisis, a substantial part of the reason being the toxic financial products circulating in their economies. Should we invite such poisonous products into our economy for the temporary facelift of the dropping rupee? Already our economy is not as sound as it is made out to be because of internal weaknesses due to profligacy in government spending,  iniquitous income distribution and hence further licentiousness and wastefulness in the spending patterns of the upper and the so-called ‘middle’ classes. Added to it, or as a corollary to it, we have dropping productivity in industries and in agriculture. To think that the opening of FDI in Insurance will bring in waves of foreign funds into our economy is foolhardy. It would, in fact, be a reverse flow in the name of deepening insurance penetration (reaching remote rural areas) and enhancing insurance density (per capita insurance).

Yes, FDI can be good, provided it helps in developing technology, if it aims to provide new research and design benefits, and if it invests money in the needed infrastructure or needed economic venture or industry. All this, provided the national strategic interests are not damaged. It is like a medicine and should be administered with a lot of care. By popping all kinds of pills of medicines at one go is no way to improve the health of the economy.  It is time we looked inside and not outside of ourselves to put our house in order.

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