The right Sort of ‘Swadeshi’

The BJP says it will usher in swadeshi economic policies. What exactly does this mean? It means, says the National Agenda on Governance, that India must be built by Indians. But it could hardly be otherwise: The World Bank and General Motors (GM) will readily agree that India must be built by Indians. So does the BJP regard the World Bank and GM as swadeshi stalwarts? I somehow doubt it. Well then, what does swadeshi mean?

Some in the party, like general secretary Govindacharya, think it means protectionism for industry. He would like to raise many tariffs from 30 per cent to 40 per cent, never mind that India’s tariff levels are already double the Asian average. Mr Govindacharya believes the Indian consumer must pay through the nose for the greater glory of the country, while singing Vande Mataram to ease the pain. But why is it glorious for swadeshi producers to charge swadeshi consumers far more than in other countries?

High tariffs will benefit a few thousand businessmen (mostly crorepatis) at the expense of 950 million consumers (with a per capita income of just Rs 1,000 per month). This is better called swadeshi exploitation than economics.

We also have swadeshi traders. The BJP was once regarded as the party of the trading community. Ask any trader whether tariffs should be lower or higher. He will prefer low tariffs, which translate into lower prices and hence help push up sales volume. But the BJP seems to put the swadeshi industrialist above the swadeshi trader too.

The party claims it will give top priority to swadeshi farmers. Really? This cannot be done just by additional investment in agriculture. If Mr Govindacharya has his way and import tariffs on industrial products go up, farmers will be able to buy less industrial goods for a given amount of farm output. So, the terms of trade of swadeshi farmers will worsen, to the benefit of swadeshi industrialists.

The farmer would love fresh foreign investment in food processing to expand the demand for his produce. Instead the BJP wants to stop all foreign investment in foods. Some BJP stalwarts think that foreign investment in foods will drive out Indian competitors or erode our food habits. This is crazy. Kentucky Fried Chicken can never compete with tandoori chicken. Ask any dhaba owner.

What about swadeshi workers? The more factories foreign investors open, the more will be the jobs created. Keep foreign investment out and you keep jobs out too. The BJP wants foreign investment in mikrochips. Such a policy will deprive India of many swadeshi jobs. Microchip factories are highly mechanised and employ very few workers, while the food industry is labour intensive and employs large numbers. Ironically, the BJP wants foreign investment to pour into the most capital-intensive sectors with least employment potential, but opposes FDI in labour-intensive sectors (like fast-food outlets).

Your logic is faulty, say some BJP stalwarts. Many foreigners come here not to open new factories, but to take over existing ones, or buy out their partners. That is true of a small fraction of cases. But even here, the end result is more factories. When Parle, Kwality and Milk-food sell out to foreign investors at fancy prices which no other Indian businessman will pay, they get a cash bonanza which can be invested in new enterprises. Even if Mr Ramesh Chauhan simply keeps the Rs 200 crore he got from Coca-Cola in the bank, the bank will lend this money to other industries to expand their business. So takeovers do not simply transfer ownership, they spark swadeshi investment in new areas too.

We do not want protection forever, says Bombay Club member Hari Shankar Singhania, we just want a breathing space to catch up with other countries where industrialists were not hamstrung by a licence-permit raj. The BJP echoes this in saying Indian business must be protected for seven years more. I agree: It makes sense to phase in import competition.

But I fail to see how the BJP policy is different from P Chidambaram’s policy, which the party has castigated as kowtowing to foreigners. Chidambaram proposed to reduce Indian import duties to ASEAN’s level (around 12 per cent) by the year 2005. That deadline happens to be seven years away, exactly the same time period the BJP proposes to phase out protection. Marvel of marvels, Chidambaram turns out on examination to be the BJP’s role model for swadeshi.

Singhania and many other Indian businessmen say they are for foreign competition through imports and investment, they just want a level playing field so that they are not asked to compete on unequal terms. There was a time when Indian business claimed that foreigners could raise money more cheaply, but that clamour has died down: Many Indian companies have switched from dollar loans to rupee loans after the drop in Indian interest rates in 1997.

But in many other ways, Indian industrialists are certainly at a disadvantage. Foreigners have excellent infrastructure that reduces their costs, India has lousy infrastructure that increases costs. Foreigners can sack redundant labour, close unviable factories, and sell surplus land to finance new investment. But Indian laws make it difficult or impossible to do any of these. Indian law on mergers is so defective that it takes ages to restructure companies, while the job can be done very quickly abroad. Liquidation procedures in India are so tardy that three companies have been in the courts for more than 50 years (this is better called ossification than liquidation). Legal delays mean contracts are not really enforceable, and crooks and criminals flourish. Despite some deregulation, many areas of industry are still wrapped in red tape. Indian banks will not lend for acquisitions or stock market trading.

So, if the BJP really wants to make Indian industry strong, the answer is to help industry in all these areas. Let the BJP improve infrastructure; amend obstructive laws on labour, land and liquidation; amend company law; reform the judiciary to ensure quick verdicts; slash red tape; and liberalise the financial sector. That is the right way to make Indian industry competitive. It means antagonising entrenched vested interests like trade unions. But without such reform Indian business will forever be disadvantaged in a globalising world.

The swadeshi vision of many people in the BJP will help swadeshi industrialists at the expense of swadeshi consumers, farmers, traders and workers. This is surely the wrong sort of swadeshi. The right swadeshi is to create a business climate in India that is comparable to the best anywhere.

What do you think?