Guest Column

This case is flawed at least on two grounds. First, the argument treats international capital inflows as being governed purely by the high interest rates prevailing in developing countries. In practice such capital flows respond to highly complex factors relating to political and business environments. In a large number of cases, the advantages due to higher nominal interest rate have been more than offset by the high inflation rate andfaster depreciation of the exchange value of domestic currencies, leading to lower rate of interest in real terms. It is, therefore, fallacious to hold that foreign capital has any long term advantage over the domestic capital.

Second, the technological advantages of MNCs over domestic enterprises arise not so much from the techniques of production in terms of factor combinations. Instead, they emerge from the superior products they bring in, in terms of additional values imparted to consumers. This is true of almost all areas of manufacturing and services sectors, e.g. automobiles Fiat Vs Esteem or Astra, communication basic phone vs Cellphone or talex vs Fax. Similar advantages could be listed in the case of other sectors such as medicine, entertainment, food processing, chemicals, leather, machine tools, electrical and non-electrical appliances and so on. It should not be forgotten that the Indian consumer got the highest value for his money during the post liberalisation era. Any discriminatorytreatment to foreign capital through tariff and non-tariff barriers, therefore, implies denial of these additional values to Indian consumers.

It may be argued that there are options to buy superior technologies from abroad. The presumption here is that there is a competitive market for cutting-edge technologies. More than four decades of experience including from India amply proves that this is not true, given that the know-how market is a monopoly of developed countries. Even the most successful of the Asian nations viz. China could not secure frontier and cutting-edge technologies until it opened its borders for foreign capital in late seventies. At its best, competitive market for off-the-shelf technologies is limited only to those of vintage types because of the low bargaining power of developing countries.

Swadeshis8217; are not opposed to foreign capital per se, but would like to direct it to essential goods and infrastructure sectors, a laudable objective indeed. Their assumption is, that at anytime, there is a given stock of foreign capital waiting for entry in to the country and if conditions are made difficult in consumer goods and non-essential sectors, it will automatically flow into the rest of the economy. This simply is not the case, FDI flows are invariably tied up with manufacturing technologies and marketing networks which are essentially product specific. Therefore, entry restrictions to foreign capital would tantamount to depriving the economy of some capital inflows and also additional values to the consumers.

The author is director research at National Productivity Council and the views are personal.

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