The whole political drama of opposition against Foreign Direct Investment ended today when the UPA government notified FDI in retails and mentioned that it is in majority. In my last post, I exposed the myth of economic reforms in form of FDI in retails. Here, I will try to explain more about what is wrong with this issue of FDI and how it is going to harm Indian economy in long run. I will also provide genuine ways for the actual economic reform that it could have been if our Prime Minister Manmohan Singh hadn’t acted so much intellectually dishonest.
What has Wal-Mart Produced for the United States?
The U.S. based Wal-Mart is world’s biggest retailer chain that is now ready to set its foothold in India. Most of the liberals and in fact, some of the libertarians are also appreciating this move and obviously, their idea is pretty simplistic, they believe some foreign direct investment is better than nothing. However, they fail to notice the effect of Wal-Mart on the US economy.
When China entered the World Trade Organization, the U.S. government thought that it will be able to reduce the trade deficit with China. However, it all proved to be opposite as the U.S. trade deficit with China kept on increasing in favor of China and this happened as a consequence of the Wal-Mart effect. The motto of Wal-Mart and other similar retail chains is to provide the products at least possible prices for the consumers. However, any economy cannot run on the shoulders of consumers alone and it requires producers too. Wal-Mart and other similar retail chains realized that buying products from China and providing it for consumers in the U.S. is better idea because China has artificially kept the value of Yuan (Chinese currency) at an absurdly lower price than the U.S. Dollar because of which, the cost of its exports to the United States and other countries is pretty lower. On the other hand, the cost of products produced in the U.S. is much higher. Chinese government not only has kept its currency at artificially lower rate of exchange, it has also repressed the labor rights of workers in China by suppressing wages and by subsidizing exports. Obviously, like any other businessman will do, the management of Wal-Mart preferred to buy artificially cheap and subsidized Chinese export products to sell them in the U.S. and other countries at a handsome profit.
This resulted in complete dishevel of production industry of the United States and it arouse as a market of consumers. It is not like the U.S. didn’t export anything to China. The U.S. exports to China produced jobs in the U.S. while the U.S. imports caused havoc on production sector of America causing a mass disappearance of jobs within a short period. The loss of jobs certainly proved to be higher than the possible creation of new jobs. The consumers of the United States kept consuming the cheaper Chinese products while the producers failed to compete against their Chinese counterparts.
The truth is that the whole mess-up and downturn of the U.S. economy and destruction of the U.S. production sector was not only because of Chinese policies of cheaper subsidized products; rather, the irrational Union Laws of the U.S. and other socialistic programs of the U.S. government also caused serious repercussions against the U.S. production sector. Wal-Mart, which is only a retailer and not producer, played an important role in the destruction of the U.S. production sector too because since they were just retailers, they don’t export anything substantial to the consumers in China, but they sell Chinese products to the U.S. consumers. This caused Wal-Mart’s own trade deficit with China.
It can be said that the destruction of the American production sector was mainly because of the socialist policies of the U.S. government and state-capitalist policies of subsidized exports, repressive labor laws, and artificial low value of currency. Now, the United States is suffering huge national debt, fiscal deficit, and trade deficit and this all can be said as the actual product produced by Wal-Mart for the U.S.
The same thing is now going to happen in India. Indian production sector is already in shambles and even now, we do use more Chinese products than Indian products and this is because Chinese products prove to be cheaper. With the advent of retail chains, this pattern of consuming Chinese products gained strength and now with the provision of 51% FDI in retail sector, Wal-Mart will start its operations in India too with the help of established Indian retail chain owners and one can guess that this phenomenon of retail chains will again produce nothing but national debt, fiscal deficit and trade deficit for India.
Will Indian Economy Suffer the Same Fate as that of the U.S.?
The United States is a developed economy, yet it failed to compete with the artificially low currency policy, repressive labor laws, and subsidized exports policy of China. India, on the other hand has an advantage over the United States. The labor in India is as cheap as it is in China. Yet, it is impossible for Indian producers to actually compete against their Chinese counterparts. This is because of the fact that India is still a developing economy.
The major sectors on which production is wholly dependent are electric power, and transportation which still are in Government’s control. Obviously, Indian producers face lack of electric power and viable environment to produce better, cheaper products. The result of this drawback will again work in favor of China because being a state-capitalist nation; China has succeeded in providing better facilities and basic necessities for the Chinese producers. Indian government never thought of improving conditions for Indian producers. Indian small scale producers are still dependent on diesel engines to attain power as they face lengthy blackouts and brownouts every day and attain electric power for merely a few hours a day. They certainly cannot compete with their Chinese counterparts because while the labor is almost equally cheap in both countries, there are no facilities for producers in India while the Chinese government offers every possible facility for producers so that they may produce more and export more.
The fact is that Chinese economy is export based and Indian economy is service based. We import much more than we export and hence, we are already suffering huge trade deficits which will further increase with the advent of Wal-Mart type retail chains in India.
I wonder why are foreign investors not interested in exploiting the cheaper work force in India and why do they seek for opportunities to exploit Indian consumers? The answer is simple, Indian government is yet not ready to let Indian producers be free and able to compete against the world. On the other hand, the advent of FDI in retails will further make Indian producers impotent. Now, the Indian producers fail to attain proper electric supply, tomorrow, they will fail to attain any buyers and this will be because their products will be costlier. Their products will be costlier because they will have to invest much more on managing required power (electricity) and they will have to spend more on transportation.
What Could Have Been the Truer Economic Reform?
Prime Minister Manmohan Singh said that FDI is necessary and while discussing recently reduced fuel subsidies, he claimed that subsidies need to end. As a matter of fact, Manmohan Singh is absolutely correct. Indian economy certainly needs more Foreign Direct Investment and it also needs a complete rollback on subsidies and taxation too. However, Manmohan Singh isn’t true about his own words.
It would have been rational if instead of approving FDI in retails, which is certainly going to hamper Indian Production Sector, the government had decided to disinvest and call for FDI in power sector, and public transportation sector, i.e. Indian Railways. After that, FDI in retails would have been the rational choice. The very first step towards free market should be the provision of proper freedom for Individuals from the burden of taxation and subsidies. However, the Keynesian economist and prime minister of India Mr. Manmohan Singh were intellectually dishonest enough to avoid any talk of major disinvestment because basically, he doesn’t believe in free market. Even about the issue of subsidies, while at one face he says that subsidies need to be ended, at the other face, his government is planning to offer more subsidies through Food Security Bill, Education for All, Healthcare for All, Health regulators at private and public hospitals and similar projects. The government has already announced a make-up policy of increased DA for central government pensioners.
There were a huge plethora of choices for the government that would have been appreciated by any unbiased person. Disinvestment in Power sector, Disinvestment in Railways, Actual Disinvestment (and not just 10%) in Indian Oils, NALCO etc. Complete disinvestment of BSNL, Complete disinvestment of Air India and so on. There were a lot of choices which might have faced similar resistance by opposition parties but still would have been considered rational.
The current choice of government is actually State-Capitalist or Crony Capitalist or Oligarchic in nature. Any Disinvestment would have been Libertarian in Nature. It is not like Indian government hasn’t disinvested anything, they have done their part of sham on disinvestment too by disinvesting Oil India (10%), NALCO (12.5%), Hindustan Copper (9.59%), and Neyveli Lignite Corporation (5%), an appreciable joke on the name of economic reforms, indeed.
It is all about the intentions. The intentions of current government are faulty, corrupt and irrational; it is case of Intellectual Dishonesty. It would be foolish to believe that Dr. Manmohan Singh doesn’t understand what I can clearly see. He understands all this, and he preferred the evil.
What will Wal-Mart and Reliance Fresh produce for India?
National Debt, Trade Deficit, Fiscal Deficit and an uncertain future will be the actual product of retailers. People will enjoy this boom at the expense of their future generation.
It is dangerous, but it is life of slaves.
The fact is that Indian production sector has been sold for the profits of Chinese production sector and the retailers will enjoy selling cheaper products at a handsome profit.
True, Indian consumers will attain cheaper products. Truer, Indian production sector is going to die. No economy can stand on Consumerism alone.
On the back of it, I would advise people to make better share of the booming share market. Make as much as you can through shares of these retail chains and convert it in Gold or Land. We will need that real money for ourselves and for our next generation.
Update: For some readers, this may sound like protectionism. However, I am not for protectionism, rather I am for fair market competition, I am for market anarchy and that is not what FDI in retails represent. Without complete disinvestment of power sector and transportation sector of India, one cannot expect a fair competition in retails. These big retailers are certainly going to get subsidized lands/electricity and all other resources required to establish themselves while the same resources will be robbed off from the common men of smaller cities, towns and villages who will have to pay for the expenditures of these coporate houses involved in retails. I am certainly against this protectionism of government for big corporate houses.