*This was something I wrote for another Economics Blog. Thought I’d just keep this blog alive by sharing it here. Feel free to trash/comment on anything I say.
India’s recent Foreign Direct Investment (FDI) policy stance has raised strong opposition and criticism from smaller businesses and enterprises in the country. This move by the Indian Government comes in lieu of India’s slowing economic growth and isn’t entirely unexpected given the government’s intentions of wanting to “regain investor confidence” (WSJ).
Based on the policy upgrade, “The new regulations allow foreign investors to buy up to 49 percent of domestic airlines and, more controversially, to invest up to 51 percent in retail industry.” (IB Times). The buying of domestic airlines would mean that investors get a greater say in restructuring these airline companies. This would then give foreign firms the ability to set new regulations for airlines companies to meet. Rehiring could also take place and they might send staff from their home country to India to take control of core operations in these airline companies, either as pilots, ground staff or administration personnel. Many Indian citizens might thus become unemployed. Investing up to 51% in the retail industry could damage local Indian small time business enterprises. Locals would choose to make purchases from big brands like Wal-Mart or Carrefour where one’d get better quality goods for the same price. Of course, if small time businesses end up lowering their prices drastically due to the inflow of these retail giants, people might decide to frequent these smaller enterprises instead. This would start a price war and would be good for consumers in the short run as they can take advantage of the lower prices. However, in the long run prices wars might end up threatening the survival of smaller enterprises simply because they wouldn’t be able to compete with these larger firms and would have to shut down from not being able to profit.
There are advantages to having an influx of FDI, however. Big foreign retailers would end up employing the locals, as they wouldn’t have to pay the locals as much. Even in the case of the airline industry, foreign investors would avoid sending talent from their country to India to work as far as possible, as they’d have to pay them more to compensate them on top of other miscellaneous fees (i.e. accommodation, travel etc.). Specific and high skill job positions like pilots might of course be an exception to this. Judging by the number of yearly airline pilot strikes in India, this might not be a good idea either. In addition to exploiting cheaper labor costs, an influx of FDI would ‘help foster stronger economic growth and get unsustainable budget and trade deficits under control’ (WSJ). Output (GDP) is directly related to Investment. Therefore if Investment increases, so would GDP, which would thereby result in long term growth. Also consumers spending at these foreign enterprises would indirectly help relieve India of its budget and trade deficits. If these foreign companies are successful in India, this might further boost investor confidence in the country and pave the way for more Foreign Direct Investments in the future. It would however take a long time for India to reach that point, simply because “The new regulations governing the FDI in retail will have to be adopted by the state governments. But several state governments have said that they will not do so.” (IB Times). Also, things like poor infrastructure might act against the interests of foreign investments.
Having said all this, it isn’t prudent and pragmatic for the Indian government to hand foreign investors such huge stakes in the Indian market. While it may help boost investor sentiments, in the short run, would cause a lot of internal opposition and act as a deterrent to foreign investors as they might feel that it wouldn’t be safe to set up their companies or operations in India due to instability. Also, it wouldn’t give smaller businesses enough time to ease into the new market conditions and find ways to adapt by making structural changes to cope effectively. I feel like it would be a better move for the Indian government to consider giving foreign investors a lower stake in the airline and retail sectors and assure them that they would make the increase with time. Also the government could assure its citizens that it would help them get through the transition. They are already doing that but they should however take a more pro-active approach in the matter. This would be useful in helping quell the immediate violent objections at the very least, which would go a long way in boosting consumer and investor confidence in the government.