Obama and FDI

If it is right for the U.S. to stop outsourcing jobs to India, it is also right for India to stop a Walmart at the door

Author: Raghuvir Srinivasan (The Hindu)

Offering  advice is the easiest thing to do, something proved all over again by none less than the President of the United States, Barack Obama. In an interview to  the Press Trust of India, Mr. Obama noted that India prohibits foreign investment in too many sectors such as retail and advised a new “wave” of reforms to attract investors. “In too many sectors, such as retail, India limits or prohibits the foreign investment that is necessary to create jobs in both our countries, and which is necessary for India to continue to grow,” he  said, noting that there was a growing consensus in India for another wave of economic reforms.

For a domestic audience

It is not difficult to guess where Mr. Obama is coming from when he speaks about FDI in retail. Walmart has been knocking on  India’s door to enter its  growing retail market which is getting more attractive by the day as a consumer culture takes hold of the thriving middle class. In an election year, the U.S. President is understandably eager to please business lobbies at home and wants to been seen as championing their cause.

Yet, Mr. Obama may  have done Walmart and others of its kind   a disservice by flagging FDI in retail as a crucial reform measure. For one, it is not as important as it is being made out to be — there are more important reform measures that India needs to undertake such as streamlining subsidies and pension reforms. Two, by lobbying for it openly, the President has managed to set off a stream of hostile reactions from across the political spectrum in India.It is bad enough for an American President to be seen advising the country but  it is worse when it is on a sensitive subject that has been hanging fire for many years now. Walmart’s quest to conquer India probably just received a serious setback.

Irony

Mr. Obama’s advice on the need for opening the economy has to be seen in the context of his own statements against outsourcing of jobs to India which is also protectionism. If it is right for the U.S. to stop its corporations from outsourcing jobs to India, which incidentally only increases their efficiencies, it is also right for India to stop a Walmart at  the door to protect its own small retailers who will be wiped out if the multinational chain sets up shop. Of course, Indian consumers and suppliers who might have benefited from the efficient supply chain of organised retail will be the ultimate losers. But that is the futility of protectionism, the price that an economy pays for it. There is enough economic literature available for those interested to read on how protectionist measures adopted by various countries prolonged the Great Depression in the 1930s. So where do these protectionist tit-for-tats stop? Globalisation, which is all about free movement of products, funds, people and also jobs, is the answer. But for it to be successful, every country has to play the game fairly.  You cannot be for one but against another! Simply put, if America wants India to open its doors to its products and its companies, it should also be open to allowing Indian companies to do business in the U.S. Mr. Obama’s advice would have been taken more seriously if only he were not clamping down on India’s IT companies by making outsourcing difficult and expensive.

What ‘deterioration’?

Meanwhile, there is another ghost that needs to be exorcised and that is the so called “deterioration” in India’s investment climate. Of course, India’s economic growth has slowed down to 6.5 per cent from the heady  nine per cent-plus levels of the recent past. Yes, inflation is still a scourge. The rupee has depreciated sharply in recent months and the deficit on the external account is higher than what it historically has been. Yet, India’s macro-economic picture has to be seen in the context of the global economic downturn that has now infected even China.  The Chinese economy slowed down to 7.6 per cent growth in the second quarter, the lowest since 2009. The eurozone is in a shambles while the other engine of the global economy, the U.S., is still down with little prospects of a turnaround in the near future. So why single out India, which is still growing at a decent clip, for a deteriorating investment climate? The comment seems to be more directed at the recent budget measures on tax avoidance rules and the bid to tax Vodafone retrospectively. There seems to be a concerted effort on among  powerful investor groups and multinational corporations to get India to drop the two proposals. Indeed, these two issues were brought up by the Treasury Secretary, Timothy Geithner, when  Pranab Mukherjee visited Washington DC in April last. Mr. Obama’s comment now is probably an extension of that. The only difference is that the President has been graceful enough to admit that “it is not the place of the United States to tell other nations, including India, how to chart its economic future …” Exactly.

raghuvir.s@thehindu.co.in