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Liberalizing for protection

Liberalizing for protection
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First Published: Wed, Jul 01 2009. 09 36 PM IST
Updated: Wed, Jul 01 2009. 09 36 PM IST
The parliamentary standing committee on commerce is opposed to foreign direct investment (FDI) in retail, we were told. If this is being protectionist, should we be apologetic about it? Hardly. Yet, its anti-FDI stance may be a wrong strategy for what it is trying to achieve.
Purely ideologically speaking, one may have nothing against the committee trying to protect the domestic market against multinational companies. After all, it is being no more protectionist than Barack Obama protecting against “jobs being exported to Bangalore”, or the “Buy American” provisions in the US stimulus package. China’s barriers to free trade and its protection of its currency are too well known to need further elucidation. The son-of-the-soil policy of the Asian tigers is nothing if not protectionist. Latin America’s protectionism against Chinese goods, has been documented. What is the Organization of the Petroleum Exporting Countries (Opec) about if not oil protectionism? What are the visa restrictions by Europe, the UK, Australia and the US for Asians all about? In short, protectionism has been and will remain well and kicking. Ergo, talk of free trade is more about political platitude than economic reality.
Thus, our parliamentary committee need offer no apology for being protectionist. But it should note its strategic error.
India is not a world power. Nor is it a major oil producer. We neither have the military clout of a US nor the diplomatic clout of a China. We are nowhere near that much-cherished permanent seat on the Security Council either. So exactly what is our might in world affairs? None, except that we are probably the world’s biggest and most rapidly growing market.
But what clout would it buy us if others had no stake in us? Imagine a large presence of major US retail companies in India. Would that not give us a huge retaliatory option should Obama try to limit our business process outsourcing (BPO) options in the US market? Imagine allowing both Chinese and American retail into India. Would that not give us some leverage against one or the other? And, of course, we are not even talking about becoming an economic powerhouse, with employment generation, investment, superior practices, competitive learning and all that. We are simply talking about the clout to play tit for tat— that will come if, and only if, there exists a large presence of, say, US multinational companies in India.
By opening up retail, we could selectively play our protectionism by insisting on, say, a certain percentage of all purchases being made from within India, or a certain minimum employment being generated locally.
Paradoxical as it may sound, liberalization would aid in protectionism.
The committee doesn’t seem to understand that. Moreover, it is not only opposed to FDI, but also to Indian corporations entering the retail sector in the areas of grocery, fruit and vegetables. At worst, this is a political gimmick. At best, it is a smart strategy to discourage those who are pressing for speedy FDI reforms.
If it is the latter, as noted above, that strategy may be wrong. If it is the former, well, the committee displays a woeful ignorance of simple local economics. First, the presence of large organized retail stores hardly replaces mom-and-pop shops; it merely supplements them. Second, organized retail creates a more efficient market for farmers and, hence, fetches them better prices. Third, the presence of organized retail channels higher investments into the storage and logistics side of trading.
All this helps the common man. Surely that should be something the committee must be aiming towards? But as with its FDI stance, it is only making more difficult what it actually professes to do.
V. Raghunathan is CEO, GMR Varalakshmi Foundation. These are his personal views. Comment at otherviews@livemint.com
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First Published: Wed, Jul 01 2009. 09 36 PM IST