India faces grave challenges as US logs for “swadeshi”, EU for duty cut
18 Nov. 2012 11:17 PM IST
The issue of foreign direct investment is rocking the political scenario. The opposition -Left to right - BJP to CPM - have started singing similar tunes, if not the same.
Coupled with this are some of the global changes - reelection of Barack Obama as US president and EU pressure to cut import duties on automobiles and many other items from 60 per cent to 10 per cent - could make dent in the Indian economy. India and the Pacific may have to deal with the resurgence of “swadeshi” in the US as Obma has to create new opportunites. It is keen on strengthening its manufacturing even in consumer goods and reducing “unnecessary” imports.
The FDI is needed or not is an ongoing debate. A country flush with almost Rs 9 lakh crore of reserves - Rs 7 lakh crore in the private corporate and Rs 2 lakh crore in public sector - may have to no think twice before seeking expensive FDI that comes with many tags and certainly high repatriation costs. Another coincidence is seen in the large NPA - bad debt - of banks. According to the latest study of RBI it has increased to Rs 1,11,604 crore from Rs 52,807 crore in 2008. The fall in asset quality is stated to be significant in public sector banks. Bad loans are rising as growth falls and industrial activity plummets.
Can FDI take the country out of this difficult situation? Growth projections are being lowered every day. Euro crisis, US slowdown, rising oil prices, energy costs and lack of prescription to turn the domestic economy are affecting GDP.
The contraction of wages, particularly in the private sector, is affecting the purchasing power capacity of the average worker. It is a difficult situation. The FDI is not generating jobs despite the fact that US FDI during the last four years has increased by 30 per cent. Conversely Indian investment in the US increased to 40 per cent. About 35 India-based companies created over 60,000 jobs in the US, according to Confederation of Indian Industry. It is the other way round than the Americans believe. The CCI study shows that more than 80 per cent workers at India-based companies in the US are Americans particularly in telecommunication, health care and iron and steel.
India’s recent decision to open insurance, retail and aviation sector may bring in US investment but it is doubtful it would create enough jobs. The past experience in some sectors like soft drinks, credit cards and similar activities resulted in creation of low-paid risky jobs. Retail companies are supposed to be poor employers even in the US. It is unlikely that they would create quality jobs in India.
Response to aviation sector has been less than lukewarm. Even if some companies come in this area it would not create many jobs. The foreign airlines know how to operate with the least hiring.
Nor does the insurance create viable jobs. They hire only part-time workers. Reelection of Obama may not help Indian economy the way India perceives. It is possible that with the kind political pressure the US has created on India more jobs from Bangalore IT hub may shift to the US and Europe. The IT companies are ordained to follow the diktat of the US president if they want to survive in their global business.
The US despite slowdown may create jobs at the cost of India. But India despite performing better is destined many benefits to the West. The latest move of the EU to lower custom duty in India for goods being supplied from Europe may create problems for many Indian companies.
Slashing customs duty on “high-end” wine and spirits is part of the Broad-based Trade and Investment Agreement (BTIA) with the European Union will make life difficult for many local players particularly at a time when barons such as Vijay Mallya have been forced to sell stakes to global giants.
Mallya sold 53.4 per cent stakes of United Spirits to Diageo. He is also exiting Aventis Pharma, the Rs 1,085-crore company whose major shareholders include Sanofi-Aventis and Hoechst GmbH. Aventis Pharma today said its promoter Hoechst would raise its stake in the company to 60.37 per cent in the firm by acquiring Mallya’s holding. Hoechst plans to acquire shares from Kingfisher Finvest, United Breweries (Holdings), McDowell Holdings and Mallya Private Ltd at Rs 1,750 per share.
On the automobile front it is feared that if the import duty on cars is lowered to 10 per cent, several European carmakers would export their cars to Indian market rather than setting up units in India. It would increase European business. They could operate without creating many jobs or some low-paid jobs.
On the other hand it might create problems for the units set up in India be it Maruti or others. The tariff protection that the domestic industry has been enjoying will go soon after a deal is signed with EU. It is a critical element of the trade pact that is being negotiated.
Initially the government had offered to lower import duty on a specified number of vehicles. Now it seems to have agreed to an across the board reduction along with a cut in customs duty on around 65 auto parts and machinery.
In return it has got EU to agree to phase out import duty on cars by 2020 and allow Indian textiles to enter the member countries on payment of concessional duty. A deal to export banana, rice and sugar has also been clinched. But EU has not allowed any concession in services, visas and labour movement. There are hitches on patent issues, social development and many other investment conditions that EU wants to put on India.
Tactics of the US and EU are not different. They no more want to give any benefit to Indian industry. Rather they are seeking access to Indian market and bleed it to their benefit.
The US may have Indo-Pacific orientation. The US may recognise that the prosperity of the world depends on ensuring that Indo-Pacific is a place where commerce and freedom of navigation are not hampered. The US believes that this would be the new way to America’s recovery.
Strategically it is keen on reducing dependence on China. But having learnt from the Chinese experience it is not keen on depending on the Indo-Pacific the same way. It would plan to have the maximum benefits and throw crumbs to the economies in the region. India has to look for new strategy.