Opening up to FDI is Indeed a Sound Policy for India

Reluctance to do something more or stretching out a bit more is perhaps in our DNA and quite in tune with it our domestic investors that have been laggards. Of course, there have been some improvements yet this is not enough if we are to continue as the fastest growing economy of the world. What one finds is that most private investors were cozy and comfortable with what they already had and taking risk remained much like opening an extra branch for elbow room or another maintenance department outside the existing compound wall of the factory. Nothing unusual was ever devised or installed.

Therefore, throwing open the FDI is really good music. I have been a strong advocate of FDI in certain sectors and less of a fan for FII especially Hedge Funds.

The opening of Indian market would undoubtedly raise the level of competition as well as quality of the products. Then of course would be the easy flow of technology into the country. As for aviation sector you cannot simply listen to traders on the street who may shout something furiously like this ‘ I have been running half a dozen consumer durable showroom professionally and was just waiting for my two sons, one at IIT and the other doing aeronautics to start my own airline.’ Nothing of this sort is ever going to happen.

It is to be noted that the aviation sector is not all that easy to handle as we all have noted even by those high profile domestic investors that had made money from scratch through hardship by selling shoes to liquor. Staying power is very much needed here as no profit would come immediately out of it. The entire system of management and the requisite technology both from managing side as well as the services and maintenance side is enormous. Although not rocket science aviation is still near to it.

So, make in India to happen faster such opening of the market is necessary.

As for the pharma sector there will be good changes in the R & D with investment made there unlike what the domestic manufacturers used to do. As for the opening of the defense sector this was quite imperative as you cannot fight modern wars with outdated weapons. Here, value addition is the prime requirement and not just employment.

The processed food would be good to farmers who want better prices for their products and hopefully they too in the long run contribute to more hygienic food. The middlemen in India are the trouble behind price rise and one has to address this problem one way or the other. Hopefully some part would be addressed this way.

The most important fact is that the Indian economy may see a jump start in investment mood. With Brexit happening India would see faster investment happening while if Brexit doesn’t happen then it would be slightly slower yet India would still be the best investment destination. Investors around the world would like to put money where market is generally stable and growing.

Overall the move is good as at the end of the day employment would be necessary for those in the skilled sector and large companies are better positioned for this. Apart from that the Indian manufacturing sector has been too tepid despite the words ‘make in India’.  Eventually, the Indian industrialists too would try to become more competitive and understand the reason for well established R & D. Again, if huge investments do come in then there will be quicker development of townships absorbing excess labor and unemployed. Besides, it would open potentials for other related services to grow.

Now another thing is to remember here that it is not just the white men with blonde hairs who would come with investments. One can be rightfully hopeful that a large Diaspora of Indians in foreign countries would do so in earnest. Of course, there are quite a good number of rules laid down and the domestic manufacturers needn’t get too worried. Besides, not all sectors are being opened up for as one would hope from the government that labor intensive areas are not subjected to that.

But most of all there must be a stable policy whether the same is in handling the volatility of currency or interest rates or investment policy pattern. Even if there is some flexibility overall structure of the policy should be carried out firmly. For instance, business is not as much attracted to an economy as much as to the well defined stabilized policy. You will note that there are countries that have higher rates of taxes than India yet investors do not complain much, but are happy with a stable regime policy.

Same is the case with black economy. When the investors see that the black economy is not likely to happen in the future due to firm stable policies and rules they will start to divert energy into the white accountable sector although by taking some time.

Rajan did just what was the Need of the Hour

Everything seemed so sudden and confusing about Raghuram Rajan’s exit from the Reserve Bank of India. What went with the government and the RBI governor is still being debated in the media. Yet he did what was right and that is to address the inflation in India which usually hits the ordinary man on the streets quite high. The common man always suffers just with a little increase in prices and the same has to be addressed through monetary intervention. And that is obviously one of the most important jobs of RBI.

Apart from politics the interest rates aren’t too high and the rise in prices ought to be checked from the supply side. This means that monetary policies have their own limitations.  There is good news that the government has started to import food grains, pulses and lentils from the African nations. This is good as that would ensure price stability. This also means that the onus is on the government to reduce the price of essential commodities. This could be stretched to mining products too.

It is to be reasoned that in the short and medium term we may have deficit of trade with most African nations and some South East nations, but that is unavoidable at this juncture. Let that continue and here is the step that politics should get better hand than economics and there should be continuous engagement through our diplomatic routes with these nations so that raw materials for consumers and industries are imported without any hassles. In the long run, of course, we can create parity in trade despite the volatility of politics there.

This would be better if we were to demarcate and emphasize trade data continent wise helping the government to keep in mind the immediate imbalances that may exist especially with African and South East nations. This could be addressed by exports later.

Mr. Rajan did an exemplary job and one hopes that the decision to quit is his own. Perhaps, he may toying with the idea to be a full academic and who knows that we may soon find some great truths in economics brought to light in the course of his brilliant research career.

One of his most remarkable achievements other than containing inflation was his unique ability to stabilize the currency and helping banks to address their NPAs and not in least bringing about reforms in the financial sector which perhaps he may leave unfinished.