The Indian government has argued that economic reforms are essential for the Indian economy. One of the major elements in economic reform is to make the country attractive for foreign private investment, FDI for short. The argument in its favor goes as follows. FDI follows from the recognition by the foreign investors in a particular country's potential for making profits. Foreign investors bring in their own capital and take the necessary risks. The beneficial effects of the FDI are derived from the propositions:

(i) it is a supplement to domestic savings,
(ii) it brings in technological improvements,
(iii) it promotes exports, and
(iv) it ensures productivity, profitability follows. Since productivity, like motherhood, is desirable, it follows logically that FDI is beneficial for the country.

In this argument it is generally assumed that any country has the potential for increasing productivity, and profitability, so that it is naturally attractive to the FDI. The only thing that discourages its flow are government regulations that hamper the freedom of the foreign investor to promote such productivity. Hence the need for economic liberalization. These regulations are promulgated either by executive office or through legislation. They take a number of different forms: e.g. Such regulation may restrict the control of the foreign investor to a minority ownership in the enterprise. It may deny FDI in some key sectors of the economy. It may restrict the amount of profits than can be repatriated. It may discourage imports deemed necessary by FDI for its production. It may not allow FDI to exploit the labor through low wages and firing policies. Accordingly, to make a country attractive to FDI, economic reform must abolish such regulation/ legislation. This is what the Indian government has done in the past four years. Its ministers and economists as well as the spokespersons of the international capital have spoken ad infinitum in favor of FDI while their hanger-on journalists have produced a thunderous applause.

The FDI flow is measured by two indices: (i) the actual investment flow that has entered the production process; the estimates vary but all of them suggest that the maximum FDI in the last 4 years has not exceeded $2 billion. In the context of India, it is a paltry sum. (ii) The investment intentions in the form of proposals for projects. This estimate is always greater than (i). In fact it is this measure (ii) which provides the necessary story materials for media journalists to create rosy pictures and ebullience. However, the ratio [(i)/(ii)] for India in the past 4 years is very small; i.e. most of the investment intentions have not materialized. Inspite of such economic reform and euphoria, the flow of FDI has been rather small. Not only has this flow been small, its composition is such that it does not provide the advantages claimed for it. A good deal of this investment is counted in the investments by such companies as Enron in energy, Enron and Reliance in oil sector. None of these investments generate export capacity or potential. Add to it the lack luster economic performance documented by Planning Commission's mid term evaluation, one finds there is little to cheer up. This explains why the media is finding itself holding the burst balloon; judging from the number or articles in the Indian press, in recent months, that now question the very idea of economic reforms.

There are two responses to such lack of economic success and a small flow of FDI. One, economic liberalization has not been enough partly because of the pressures of politics. What is also needed is political support consistent with such policies. In other words, the FDI does not flow merely from desirable economic policies, it also requires desirable political actions. The party in power must be committed to accept all the whims and eccentricities of the foreign investor. By continuously arguing that economic reforms should be, and have been, accepted by all parties - capitalist cum elitist, Marxist, nationalist - the media writers have been trying to promote, even create, such political climate. The newspapers have, therefore, played up the goings and comings of the ministers of non capitalist/elitist parties as supportive of these reforms. Of course, it is not lost on these journalists that such policies are beneficial to them as well in the form of better perks. The decision by the nationalist Maharashtrian government to cancel the Enron "sweet heart" deal- to use World Bank phrase - came as a sudden shock to them and has forced some to recognize that nationalist political parties will not follow whims of the FDI. Hopefully, it makes them question the meaning of FDI and economic reform.

The second response is to reexamine the basic premises of FDI. One, as the government opened the country to attract FDI, it also had to promote consumerism considered as a necessary condition. Consumerism impacts domestic savings negatively. It is not incidental that the saving- income ratio in India has declined steadily over the last four years; from 24 % in 1990-91 to 20% in 1993-4. Other countries, such as Mexico, have also experienced similar decline. In the process, FDI has lost much of its advantage as it became a substitute instead of supplement to savings. Since the flow of FDI is small, the country has suffered a net loss in the saving front thereby reducing its potential for income growth. Two, even though FDI is supposed to introduce new technologies, the experience anywhere, and in India so far, does not support this premise. There is no empirical evidence about any major advance in the technological base in Indian industry. In fact the major advances have come from domestic capital; e.g. software production. FDI, so far, seems to be interested not in production but in control. FDI attracted to consumer goods production, such as cola, fried chicken, potatoes, does not add to the technological base of the economy.

Similarly, the FDI in the energy, oil and telecommunication sectors is adding no new technologies. On the contrary, it has a negative impact because it (a) promotes investment in low technology goods, and (b) discourages domestic capital's move towards new-technology goods. Three, if one looks at the rate of growth of exports from India, there is little contribution from the FDI. Here again, the fastest growth rate is in software. Four, the idea that FDI is efficient, and productive, is more of an assertion than a fact. The record of multinationals in the US impresses one by its level of inefficiencies as documented by a continuous need for downsizing. Downsizing is a confirmation of a fact that these enterprises are not efficient; they need to shed uneconomic parts. It is not clear which parts are uneconomic. The downsizing spiral continues and these enterprises remain inefficient, non competitive and unproductive. Their FDI can not lead to efficiency. Five, the objective of FDI is profits not productivity. If profits can be gained by other means, productivity is easily scrapped. This is the lesson from the Enron caper where the IDBI[Industrial Development Bank of India] estimates a 40% rate of profit of the Enron-Reliance oil deal with estimated profit rate of 100%. Such high profits do not follow from productivity. Six, the historical experience from all over the world is contrary to this idea. Every country in its time, UK, Germany, USA, Japan, Korea, grew not by a free-wheeling FDI but by one that fitted well with its needs.

Any country that desires, and designs, to grow domestically and compete internationally needs to increase its domestic savings - income ratio and develop its production capacity in new technology goods because the world market in new technologies is growing at a much faster rate. New technology goods formed about half of the total world trade in 1980; a decade later it is constitutes more than two third. A country that can export new technology goods can easily raise its market share in the world trade. Economic reform policies are not consistent with these objectives; speeches, hoopla and euphoria notwithstanding. What is needed are different polices based on an alternative strategy of swadeshi. Swadeshi and economic reform follow from different paradigms. Their differences lie in all spheres. Swadeshi promotes personal character, family and community. Economic reform induce corruption and individualism. Within the narrow sphere of the economy, swadeshi helps to curb consumerism so that savings-income ratio goes up while at the same time it promotes exports. In fact this is what the countries in the Far East have done. FDI can be helpful only if it is well coordinated, monitored and tailored so as to fit into a investment process that leads to income growth and international competitiveness.

Swadeshi imposes two conditions on FDI: (i) it must increase the production potential in new technology goods and the market share of its exports, and (ii) the profits, particularly the repatriated profits, must be a proportion of increases in productivity and export earnings. By this second criterion, the Enron energy deal and the Enron-Reliance oil deal are uneconomic and therefore unswadeshi. Thus, within the narrow sphere of foreign investments, there is a major difference between the government's economic reforms and the alternative policy of swadeshi. Economic reforms impose conditions on the economy and society requiring it to do everything for the benefit of foreign investment while swadeshi imposes conditions on the relevance and efficacy of the foreign investment for the benefit of the country..One can no doubt question if FDI will be available under these conditions. One can also ask: what is the use of FDI if it is not beneficial?

Romesh Diwan, Professor of Economics
Rensselaer Polytechnic Institute, Troy, NY 12180
email : diwanr@rpi.edu

Policy on Economic Affairs