Why are we so scared of FDI? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 18 January 2014
PRINTER FRIENDLY | ARCHIVES
Why are we so scared of FDI? A  A  A

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
One of the biggest impediments to growth in recent years has been large opposition to allowing additional foreign direct investment (FDI) into the Indian market. Nowhere is this more pronounced than in retail, where attempts to liberalize the sector have been unsuccessful on multiple occasions.

While it is true that there will be winners and losers if we allow more FDI in retail, the overall economy will benefit. The benefits to the economy include higher employment, higher GDP growth, improved infrastructure, lower trade deficit, and better quality products. Ultimately, greater competition in the sector will benefit the end consumer significantly.

A good example of this phenomenon is the Indian automotive industry. Until India liberalized its economy in 1991, the auto industry was dominated by just two cars; the Ambassador and the Fiat. For anyone who remembers driving one, these were poor quality cars. Due to a lack of competition in the auto sector, there was no incentive to improve the quality of cars over time.

Once we allowed foreign competition, the car industry improved dramatically. Today, we have access to high quality cars produced by both foreign and domestic companies. The cars produced in India are of such a high standard, that automobiles are now one of our major exports. It is not just foreign companies that produce good cars in India; it is Indian companies too.

Companies such as Tata Motors and Mahindra & Mahindra produce high quality cars on par with foreign cars. It is no coincidence that the quality of Indian made cars has improved since liberalization. By exposing ourselves to foreign competition, we had no choice but to improve the quality of products that we make. If we hadn't opened up the auto sector, we'd still be driving the same Ambassadors and Fiats today.

When it comes to allowing FDI in retail or any other sector, we must not be scared of foreign competition. Instead, we should welcome it as an opportunity to improve the quality of the products we make. In the long run, we will be better off for it. In the short run, we can find a way to adequately compensate those negatively affected so that it is a win-win for everyone.

We invite you to please post your view in the Equitymaster Club forum on the importance of FDI to increase competition and improve our economy in the long run.

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is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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24 Responses to "Why are we so scared of FDI?"

Anand

Jan 29, 2014

I dont think Indian people are scared of Competition. The comparision between Automobile and Retail is not right too. Not every street in india had a auto manufacturer or ancillary industry. But in Retail the story is completely different. Arm twisting the local is the very reason why none of the biggies survived in Germany. To grow economy government can also provide a proper framework, regulation and empower local biz folks which would help country to gorw and become more competitive in world market. It's the will which is lacking and to overcome that we shouldn't allow outside competition so early without proper infra setup in country and kill the inner core.

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Sharma

Jan 24, 2014

Automobile sector was opened prematurely, making govt get away from providing basic transport services in cities. Most of the Indian cities today don't have good transport infrastructure. Metro is an after thought and costs are too high. We talk about good roads being built after automobile sector was opened. Which car company has invested in these ? Who pays tolls at these roads ? Couldn't we develop railway lanes for fast trains next to these National Highways , why was it not done ? - Automobile lobby ?

Similarly FDI in retail may be a premature decision. Who will improve the infrastructure ?

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SR

Jan 22, 2014

Mr. Assad,

Your comparison of Automobile to Retail is far fetched as these two sectors impact different sections of the society. Retail FDI essentially has greater impact to the lower and larger section of the society compared to those elite who can afford four wheeled luxuries/necessities.

Look at this way:
1. Would you rather buy Thai rice against homegrown product when Walmarts of the world force the farmers ( down the road) to use their prescribed genetically modified seeds and strong fertilizers which will eventually render our lands infertile. This would send our already suiciding farmers to accelerate their journey towards the end.

2. Would you rather buy Wheat or Coffee grown outside of India giving due to same reasons.

While in the short run, it would provide employment to some section of the society the long term ramifications to an agrarian society like ours, essentially selling our country to capitalistic minds of the west. Look at many of the local industries that are nowhere to be seen now due to Unilever, P&Gs of the world entering India.

Like (1)

Ajay Kumar Gupta

Jan 20, 2014

I feel the FDI with Govt with honest and tight control can be beneficial for the country. Rather competetion is always good for market.

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JOISA

Jan 20, 2014

Sir,
Why we need FDI in PIZZA, COKE, RETAIL, BATHROOM FITTINGS LIKE KOHLER, GOHE etc. Why they r not investing in technology transfers. If they bring $10 they will take away $100 as can be seen in HOLCIM, COKE etc
WITH REGARDS

Like (1)

anil k kothari

Jan 20, 2014

sir my view is that unless we have a sound manufacturing base we should not allow FDI in retail or else it will benefit the manufacturing sector of china, shareholders in US and Europe and will cause harm to local retailers. Can check in Thane where local shopkeepers are suffering bacuse of many retail outlets

Like (1)

Babu Philipose

Jan 20, 2014

The major retailers import from China as much as possible to increase profit & amass wealth, which in turn destroys the small-industries & small-scale sector. USA is a classic example of same, whose major Retailers imports even the chappal from China for increased profit, which made China the world's 2nd largest economy and with prosperity they happened to be threat to every other country in the world.

Like (2)

Babu Philipose

Jan 20, 2014

Opening up Retail is like sending out millions of shopkeepers & small traders and their family members into starving while allowing few to amass wealth from the public like Wal-Mart in one method and Ferdinand Marcos in Philippines through another. Walmart's accumulation of wealth is from small-time traders, whereas Marcos stolen the food of the country's poor and deposited into Swiss Bank, who took it away on technical terms. Let the FDI's start manufacturing like Motor Vehicles, Computers, etc. and NOT in Retails.

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Manoj Kumar Mondal

Jan 19, 2014

I avoided commenting on earlier occasions when FDI in retail was highly lauded. Without being harsh, let me put some simple data. Some big retailers are not happy with the 35% local sourcing norm and they want a cap of local sourcing only up to 15%. It clearly indicates that they would like to procure at least 65% from abroad. Consider that the retailers’ annual sales is 100 billion dollars. That means they want to use 65 billion dollar to import goods and procure 35 billion dollar of local goods. Should one need to clarify that we inherit 65 billion dollar of trade deficit every year in this process? Agreed that we already import part of our need anyway and 65 billion is exaggerated figure, but will such retailer not exacerbate the already bloated BoP position of our country? Secondly, the capacity of these retailers to locate the cheapest goods at any corner of the world is amazing. With high interest rate structure and huge inflation our manufacturers do not stand a chance and will quickly lose market to foreign manufacturers, particularly those of China. FDI in industries where the country is technology deficient is surely not only welcome but essential. But will people stop generalizing FDI and wake up to reality about FDI in retailing that brings no significant technology?

Like (1)

Vinod K Sharma

Jan 19, 2014

Running away from competition only protects the incompetent. The consumer always suffers in the process. Regardless of the sector, healthy competition would only benefit the Indian Consumer. Sure, in the case of FDI in retail, most of the middlemen would have no place but making policies on their behalf is no less populist than a host of other measures all Indian politicians have practiced - AAP not excluded.

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