Politics, Protectionism Create Chaos in India

Wednesday, 07 Dec 2011 10:02 AM

By Ashish Advani

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I am in India this week. I have followed India for many years and I have often written to you about India and visited India frequently.

Today I stand disheartened and disappointed with the recent events here.

I have written to you in the past few weeks about Indian rupee and how it has depreciated significantly in the past few months. I have written that this is a blue-light special price and we should take advantage on the rupee being available at these prices.

While I am not reversing that call, today I have gained a deeper insight which makes me delay my call on the recovery of the rupee.

Three weeks ago, the ruling Congress party, led by Dr. Manmohan Singh, made a bold move and implemented long overdue reforms which were related to Foreign Direct Investments (FDI).

The government made an executive decision to allow 51 percent participation by foreign companies in the retail sector. This would allow the likes of Walmart, Costco and Carrefour to open shop in India directly.

This would bring in very valuable and much needed foreign exchange inflow. This move would reverse the depreciation of the rupee as well as improve the trade deficit balances.

This bold move reminded me of the early 1990 days when India opened its doors to the foreign investors. Before that, India had kept its economy closed and out of reach of foreign owned businesses.

Dr. Manmohan Singh was the visionary finance minister in those days and singlehandedly led the charge in getting the reforms done. Since then we have seen incredible growth for the past two decades. India went from a small poor country to an economic powerhouse not just in Asia, but at the global level as well.

Even in those days, there were quite a lot of disbelievers and protectionist politicians who opposed the move. They were nervous about the loss of local employment and small businesses being crushed y the large foreign companies. There was a hue and cry to disallow this modernization.

However, the government had done its research and stayed firm on their plans. History shows that this opening of the economy was the best thing that happened to India.

The situation is eerily similar now. The government wants to now open the retail businesses and airlines to foreigners so that further investments from overseas will come into India.

The opposition was up in arms claiming that this level of foreign company involvement will destroy the agriculture sector and the local mom and pop businesses selling groceries. The claim is that companies like Walmart will source the products from overseas and not buy locally which will destroy the local businesses.

Most businessmen have seen this as political posturing. Businesses are actually welcoming this move and do not see the incomers as a threat to the local businesses.

The opposition whipped up public frenzy and created pandemonium enough that the government has had to withdraw this proposal and shelve the plans for now.

This is a big loss for businesses, loss of reputation for India as well as will prove to be detrimental to India if these plans are actually canceled.

Not only will business suffer, it will also deter the help to the current account deficit.

That will lead to further depreciation of the rupee.

I lament the direction of forward progress in business in India. The reason for this rollback is political bickering and protectionism rather than sound business reasons.

I am hopeful that calmer heads will prevail and that India will overcome this obstacle soon. I will keep a keen lookout on this matter and report back to you as soon as the matter is resolved.

Until then, stay strong and diversify your investment overseas.

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