FDI in India - An Ethical Dilemma?.

On saturday night, i was watching the santosh sivan directed malayalam movie - "urumi".  Along with the breathtakingly beautiful cinematography(as one would expect of Santosh Sivan), the story of Kelu nayanar who challenged Vasco Da Gama and the Portuguese supremacy unfolded.Well, this post is not about writing a review of the movie - though i liked the movie. It had been refreshingly different. But what i want to write about is the message that the director has tried to bring out through this well crafted film.  Till saturday evening, i had been a vehement supporter of FDI in India. But this film had succeeeded in planting a doubt or two about it!.

The movie speaks about how portuguese, who came to trade with us slowly became our masters.So was the case with British. The movie ends with a modern day analogy where in we allot land to foreigners to come and set up their factories here. This is exactly what has been  the centre of debate ever since the Korean giant POSCO tried to open its steel plant in Paradeep,Orissa. It is the single most largest FDI ($12 billion) in India till date. So the pro-development people have argued that such a step is important to increase our forex reserves as well as to induce growth for our economy. But questions have been raised about its environmental impact (the plant requires deforestation of huge amout of forest land) and also about the concerns of villagers who will be forced to move out of this area.

Obviously Santosh Sivan views the FDI as a necessary evil, where we pave way for foriegners to establish their supremacy once again. So now i have 2 doubts - is FDI an evil in itself?. Or is it the way we implement it(not providing rehabilitation programs for the poor people displaced) that is evil?.

I tend to agree with the second , where as the director's stand is the first. Ofcourse, the story has cunning politicians and multi national companies, who are only interested in maximising their own profits. But that should not be a reason for us to shoe them away. We should have good government policies in place so that the people who come here for business do just that!. In the way , if they make profit well and good. But it helps our own economy, our own people.  This should not be at the cost of poor people losing their livelihood.

In the end, i think FDI is not an evil as such. The problem is with the intermediates trying to make mileage out of it. A good way to go about it will be to provide annuities to the poor people ( as a percentage of the profit that the company makes) and not just one-time compensation. A way should be there to factor in the value of land appreciation over the years. All these if properly implemented will be a win-win situation for both the foreign company and the poor villager displaced.

raghuram rajan and financial crisis....

I am a fan of  Raghuram Rajan , who predicted the Financial crisis before it happened. This he did while at a dinner party hosted to celebrate the retirement of alan greenspan, the then chairman of US Federal reserve, whom many hold responsible for his loose monetary policies which ultimately led to the financial meltdown.
He was the chief economist at IMF and now a professor of finance at booth school of business,chicago. He is also the economic advisor to the PM of India.

I purchased his book - Fault Lines from flipkart.com. They offered 40% discount!. To hell with bookshops in Bangalore!(who dont offer any discount > 10%). Thanks to excellent customer support from flipkart, i received the book the very next day and started devouring with great apetite from then next day..I am yet to complete the book , but from what i have read it promises to be provide a very good insight into the root causes - not just the superficial reasons as we know them - of the sub-prime crisis.

Ever after, when I hear his name mentioned in the newspapers or articles, i follow them keenly. Today I read another well analyzed aritcle at project syndicate - where he finds reasons on why the government stimulus packages have failed to lower the unemployment rates. As in his original book, he points out that the government policy makers fail to see beyond the surface.He advocates imparting "new-skills" to the construction workers who lost their job following the crisis as key to improving the employment rate. The unemployment rates cannot be lowered by increasing demand as thought of by the policy makers.

In another article , he ponders over why the economists missed predicting the crisis at all. His reasons are both intuitive and insightful.


Note - An excellent article by Paul krugman on the reasons for the financial crisis - explains very lucidly the keynesian and the new-classical school of thoughts...

consequences of arab revolts...

Was reading an interesting article on government handouts in Arab countries (to appease the people revolting) .
Came across this interesting quote -

"If a job is indeed productive, its output would be rewarded by other members of society who benefit from it, without the need for government subsidies and guarantees.The fact that government guarantees a job implies that its output is not wanted. Such jobs are a liability for society, not an asset." 


Should some of the politicians in Kerala ponder over this?.


I am referring to - this article at Project Syndicate.

How economic freedom can be used for development...

I liked reading about late YSR in this Economic times editorial by swaminathan aiyer.

If these facts are true, then YSR was close to what a 'practical' Chief minister can do in India.

There is no denying that there will be corruption & nepotism. But to ensure social growth with emphasis on economic freedom is commendable and YSR should be lauded for that.

This article made me look up wikipedia for the term "crony capitalism".

 and i found this.

 The link has special mention for India (reference to its "licence raj" before 1991) . Interesting.. :-)

The Hindu and its Anti-american ways..

I feel the Hindu is often shortsighted in its approach  towards India's foreign policy.
Why does nt it see the bigger picture?.
The article that i am refering to is yesterday's Hindu editorial on accusing Obama of going bush way. ( Hindu Editorial , 22nd march ,2011).

Let me dissect this editorial. The editorial starts with the stands taken by different governments which have condemned  the attack on Libya. - Russia,China, Turkey etc. . This saws the seeds of Anti-America in the mind of reader.Very clever indeed!. The editorial then compares these attacks with the attacks against kosovo and claims how sarkozy is using this war to project himself as a leader.

Ok, i am not being myopic to these facts. But the Hindu "pretends" that it does not see the big picture. What about the thousands of civilians whom Gadhafi has killed?. Does Hindu have a solution towards the Libyan problem?. Else it should keep quiet. (sorry for sounding exteme here).  As written in my previous post, only practical way of dealing with a bloody ruler like Gadhafi seems to be throwing him out of the power. Peaceful talks may not work. countries are wary about the attacks killing civilians. But, what about the civilians being massacred by Gadhafi's forces?. Any day, it is better to throw him out of power.

By missing these facts and not presenting the correct picture to the reader , Hindu is just re-inforcing its anti-American stand.  When talking about an issue, it should present both sides of the story, which is not the case here. I do not agree with the editorial which misleads the public.

PS- I am not pro-US but just found the strong anti-american bias in the editorial uncalled for.

Update - Read this article in the economist - the comments are also interesting.

India's foreign policy and Libya

The allied forces led by France,the UK and the US started their defensive on gadhafi on saturday following the refuttal of ceasefire promised by him. I read yesterday that India strongly condemned the attacks on gadhafi's forces. Mind you, all the BRIC countries are on consensus on this issue. Russia too came forward and condemned the whole thing. This issue and how this has been dealt by India has raised some questions in my mind.

Firstly, India and four other abstained from voting in favor of the proposal of no-fly zone in libya last week at the UN. This was understandable. India argues that any attack will lead to loss of civilian's lives and a solution to the libyan problem should be achieved through talks and not through missiles.

Now the question is - is this the right way to handle a bloody dictator like Gadhafi?. The way he has projected himself on the TV, the way he has gone about the whole thing makes me feel that this guy is not going to oblige to any talks. He has acclaimed that he will pull each rebel out of their homes and kill each of them. So will India's approach help in his case?.

There is a saying in malayalam that  - "kuthan varunna pothinte aduth vedam othiiyitt karyam undo" . meaning is there any use reciting Vedas to a bull that is running towards to you to attack you.
I feel India's approach towards gadhafi is somewhat similar to the idea in this saying.

Agreed, the allied forces should keep in mind they don't harm the civilians.(more easily said than done).They have not done any good for themselves , when US defense secratary proclaimed yesterday that their aim is not Gadhafi! .This approach is confusing.

If they want to keep peace in libya and act in favor of people, what better approach than throw Gaghafi from power?. This should be the way forward and India will do well if it takes a strong stand in this case and not just sit at home and condemn the strikes against gadhafi.

An analysis of the union budget 2011-12.

The perception among  the economists and the industrialists has that the budget is a reasonably good one. The main challenge before the FM was to push for inclusive growth , while bringing down the current acccount deficit and the inflation..I am not sure how far the budget will help in achieving this, for there are lot of assumptions that the FM makes. But it definitely is a step in the right direction - laying out an excellent plan with long term benefits in mind.  The main challenges may on the implementation side and may be the assumptions that the FM makes.


Positives-

1) Increased allocation for education - 52000 crore . 23% higher than before. This is a key area - because investing in education is important because we need skilled labour and only through these steps can we capitalize on India's demographic capital. This is a step with long term benefits in mind and is very good for the economy.

2) Direct Subsidies for the poor, thereby eliminating the incentives for a middle men. This is a big steps towards increasing the efficiency of subsidies. But a flipside that i hear is that  - this will not be effective from April 1,2012 until we have the UID implemented.

3) MNREGA  - allocation same at 40,000 crore. (same as previous year). This is good as the government is focusing on the effective implementation rather than increasing the allocation and the resulting money landing up in the pockets of corrupt beurocrats and middle-men.

4) Steps towards moving to  GST and GTC.- which will simply and reform the tax system.

 Negatives -

1)A Key issue that many economists point out is that there is nothing new in the budget . what he has put in the budget are things which are already being talked about.
2) No concrete steps to bring back the black money .
3) Tackling corruption - just forming a counsil of ministers. sufficient?.
4)  No concrete plan on how the deficit will be brought down to 4.6%.

Neither positive nor negative(gray areas) -

1) Oil subsidies to be brought down - positive or negative?. I am confused on whether this is good or not?.
On one side it reduces the burden on the govermnent thereby helping to reduce the current account deficit.
But on the other side, this reduction implicitly implies that there will be a policy change on the government's part - either deregulate the diesel price and pass on the burden to the consumer. This may spiral inflation.

2) MAT tax going to harm the small software firms - There is a MAT tax ( though i am not sure what this means) being thrust upon on the SEZ. This will be passed on to the software companies. Though biggies such as Infosys will not be affected by this , this is going to affect the small companies.  Nasscom Chief Som Mittal has come out in open against this.

3) Allowing FIIs to invest in Mutual Funds - Most economist see this a positive step. But FIIs are generally not considered as a stable investment. They can withdraw any time. FDIs are anyday better. But ofcourse, something is better than nothing!.

But the government had to something to reduce the current account deficit and this time it is the software services industry that has fallen on its radar.

A big issue is that there are no concreate plans on how the current account deficit is going to be brought down to 4.6% of the GDP.  The tax exemption limits has been increased. The FM is assuming that more people will come forward and pay tax because of the growth. This looks a bit far fetched to me.