Economic Highlights

New Delhi, 16 November 2012

Challenges For India

US LOGS ‘SWADESHI’, EU DUTY CUT

By Shivaji Sarkar

The issue of foreign direct investment continues to haunt the nation. The Opposition, Left to right, from the BJP to CPM, have started singing similar tunes, if not the same. Coupled with this are some global changes i.e. re-election of US President Barack Obama and EU’s pressure to cut import duties from 60 to 10 per cent on automobiles and many items that could make a dent in the Indian economy.

Additionally, both India and the Pacific may have to deal with the resurgence of ‘swadeshi’ in the US, as President Obama has to create new opportunities, as promised. America is keen on strengthening its manufacturing sector, even in consumer goods, and reducing “unnecessary” imports.

The debate whether the FDI is required or not is ongoing. A country flush with almost Rs 9 lakh crore of reserves – Rs 7 lakh crore in the private corporate and Rs 2 lakh crore in public sector – may have to think twice before seeking expensive FDI that comes with many tags and high repatriation costs.

Another coincidence is seen in the large NPA – bad debt – of banks. According to the latest study of the RBI it has increased to Rs 1,11,604 crore from Rs 52,807 crore in 2008. The fall in asset quality is stated to be significant in public sector banks. Bad loans are rising as growth falls and industrial activity plummets.

The moot question is: Can FDI take the country out of this difficult situation? Growth projections are being lowered every day. Euro crisis, US slowdown, rising oil prices, energy costs and lack of a prescription to turn around the domestic economy are affecting the GDP. The contraction of wages, particularly in the private sector, is affecting the purchasing power capacity of the average worker. Indeed, it is a difficult situation.

Unfortunately, FDI is not generating jobs despite the fact that American FDI during the past four years has increased by 30 per cent. Conversely Indian investment in the US increased to 40 per cent. About 35 India-based companies created over 60,000 jobs in the US, according to Confederation of Indian Industry. It is the other way round than the Americans believe. The CCI study shows that over 80 per cent workers at India-based companies in the US are Americans particularly in telecommunication, health care and iron and steel sectors.

India’s recent decision to open insurance, retail and aviation sector may bring in American investment but it is doubtful whether it would create enough jobs. The past experience in some sectors such as soft drinks, credit cards and similar activities resulted in creation of low-paid risky jobs. Retail companies are known to be poor employers even in the US and it is unlikely that these would create quality jobs in India.

Response to the aviation sector has surprisingly been less than lukewarm. Even if some companies come into this area it would not create many jobs. It is well-known that foreign airlines are experts in operating with the least hiring.

Nor does the insurance sector create viable jobs. They hire only part-time workers. Perception is that Obama’s comeback may not help the Indian economy the way New Delhi perceives. It is possible that with the kind of political pressure that the Americans have put on India more jobs from Bangalore IT hub may shift to the US and Europe. The IT companies are ordained to follow the diktat of the US President if they want to survive in their global business. Despite the slowdown, the US may create jobs at the cost of India and the latter despite performing better has destined many benefits to the West.

This apart, the latest move of the EU to lower custom duty in India for goods being supplied from Europe may create problems for many Indian companies. Slashing customs duty on “high-end” wine and spirits is part of the Broad-based Trade and Investment Agreement (BTIA) with the European Union, which is bound to make life difficult for many local players, particularly at a time when liquor barons such as Vijay Mallya have been forced to sell stakes to global giants.

Mallya sold 53.4 per cent stakes of United Spirits to Diageo.  He is also exiting Aventis Pharma, the Rs 1,085-crore company whose major shareholders include Sanofi-Aventis and Hoechst GmbH. Accordingly, Aventis Pharma has stated that its promoter Hoechst would raise its stake in the company to 60.37 per cent in the firm by acquiring Mallya’s holding. Hoechst plans to acquire shares from Kingfisher Finvest, United Breweries (Holdings), McDowell Holdings and Mallya Private Ltd at Rs 1,750 per share.

On the automobile front, it is feared that if the import duty on cars is lowered to 10 per cent, several European car manufacturers would export their cars to the Indian market rather than set up units in the country. This would increase European business as these could operate without creating more jobs, even some low-paid.

On the other hand, this might create fresh problems for the units set up in India be it Maruti or other car manufacturers. The tariff protection that the domestic industry has been enjoying will go soon after a deal is signed with the EU. This is a critical element of the trade pact which is currently being negotiated. Initially the Government had offered to lower import duty on a specified number of vehicles. However, now it seems to have agreed to an across the board reduction along with a cut in customs duty on around 65 auto parts and machinery.

In return it has got the EU to agree to phase out import duty on cars by 2020 and allow Indian textiles to enter the member countries on payment of concessional duty. A deal to export banana, rice and sugar has too been clinched.  But the EU has not allowed any concession in services, visas and labour movement. There are also hitches on patent issues, social development and many other investment conditions that the EU wants to put on India.

Therefore, the intimidating tactics of both the US and EU are no different. The two don’t want to give any more benefits to the Indian industry but seek access to the Indian market and bleed it to their own benefit. However, the US signs a tune of having an Indo-Pacific orientation. It may recognise that the prosperity of the world depends on ensuring that Indo-Pacific is a place where commerce and freedom of navigation are not hampered and believes that this would be the new way to America’s recovery.

Strategically it is keen on reducing dependence on China. But having learnt from the Chinese experience it is not keen on depending on the Indo-Pacific the same way. It would plan to have the maximum benefits and throw crumbs to the economies in the region. India has therefore to look for a new strategy. ----INFA

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