This is an op-ed piece that I wrote as an assignment for the ECON course : Macro-economics for Citizens ! A special mention – I received an ‘A’ for this assignment.
I deeply admire my Eco Prof Avi J. Cohen
YES and NO to FDI!
South African politician Nelson Mandela has often repeated the old maxim: “Where you stand depends on where you sit.” And this is clearly demonstrated in the frenzied debate following the Indian Government’s decision to allow 51 % Foreign Direct Investment (FDI) in multi-brand retail. Politicians on both the left and the right end of the spectrum are making selective arguments in order to protect their respective vote banks. So can FDI bring economic prosperity for the entire country?
FDI is a direct investment made by a company or entity based in one country, into a company or entity based in another country. The popular argument supporting FDI in multi-brand retail is that allowing corporations such as Walmart to set shop in India will expand opportunities for Indian farmers, by offering them better prices (by eliminating middlemen) and help lower the cost of living for Indian families (by offering products at cheaper prices). Further, it will boost employment by creating more jobs in the organized retail sector and develop back-end infrastructure, including cold storage facilities, thereby improving the overall state of the economy.
The argument is naïve in stating that FDI will help improve the overall economy. Two decades after India liberalized its economy, changing socio-economic conditions in the country have further increased economic disparity. Economist and Nobel Laureate Joseph Stiglitz supports this view – “Don’t focus on FDI in the belief that it will solve all problems”.
However, the potential of foreign capital in helping reform the agricultural sector cannot be undermined. According to a report published by Live Mint, shortage of cold storage facilities in India has resulted in 18-40% of agricultural produce being lost. Increasing the supply of cold storage facilities will not only solve the food waste management problem, but also help the government control the rising food prices. The Indian Finance Minister, P. Chidambaram aims to cut current fiscal deficit from 5.2% to 3% by 2016-17, which means that the government will take measures to reduce spending. FDI in infrastructure can be a good alternative for the government to raise capital and continue its reduction in spending.
However, FDI is a debt inflow into the country, as the profits generated by the investment will be repatriated in foreign exchange, resulting in the outflow of foreign exchange from the country in the long run. If we want the benefits of organized retail to accrue to all the stakeholders in the Indian economy, the government must help domestic retail entrepreneurs get access to cheaper capital and foreign technology so that they can expand operations and create sustainable businesses that cater to the needs of the Indian consumer.
With a population of over a billion people, India is a huge potential market for the global retail industry. Walmart has a vested interest in setting shop in the country. But, the Government needs to address the interests of its citizens. We need to attract foreign equity that will be an asset to the country, and not just serve the interests of the foreign corporations.
Simplifly 