Prime Minister Narendra Modi says after opening up sectors across the board to 100% foreign direct investment (FDI), from aviation to defence to pharma to telecom to single-brand retail, that India is the most “open economy” in the world. It sounds good, but does not make much economic sense. But then, it is not right to look for substance in every byte of a political leader. But it does show that Modi does seem to think that the Indian economy needs that crucial transfusion of foreign investment. This is right only up to a point.

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FDI is no panacea. It is no economic elixir. It cannot revive the Indian economy if it is collapsing. And the Modi government would be the first to stand up and say that the Indian economy is doing extremely well. But the second part, that is, FDI as elixir, seems to be lurking in the subconscious of the Modi government. This is a symptom of anti-socialist reflex, which many in the Modi government suffer from. Modi himself still carries in himself, traces of socialist thinking, due to his deprived childhood, due to the thinking of Deen Dayal Upadhyay, who was also in agreement with Ram Manohar Lohia. 

Another man who was quite keen on FDI for India was former Prime Minister Manmohan Singh. Addressing the Confederation of Indian Industry (CII)-World Economic Forum (WEF) annual event after Congress returned to power in 2004, Singh told the captains of industry that they had resisted the idea of bringing in foreign capital and foreign players in 1991 when the economic reforms were launched, but that it had shown that Indian industry was capable of facing competition and surviving. It was a left-handed compliment to the domestic industry for recognising the need for foreign capital and foreign collaboration to improve things at home. Singh sincerely believed that India cannot do without FDI if it has to move forward. 

But the FDI question is not as one-sided as Modi and Singh made it out to be. It is not just meant to strengthen the Indian economy, and make India an economic powerhouse like China. Foreign capital and foreign players have to be allowed in India if Indian players are to access the foreign markets as easily. The Tatas cannot be allowed to buy British steel factories or automobile manufacturers, if foreign players cannot hope to do the same in India. It is a reciprocal act. If foreign pharma biggies can grab Indian pharma companies, which they will after this decision to allow 100% FDI in the pharma sector, it should be possible for Indian pharma majors like Sun Pharma and Cipla to do the same abroad. 

Modi and Singh can be faulted for not looking at the flip side of opening up the economy. If there are problems in the global markets, it will affect the Indian economy too. India cannot boast as the Modi government is now doing, that its economy is doing well although the world economy is in turmoil. Indian economy will now have to face the high winds of the open seas as it were. There are no free lunches. India cannot hope to take the positives of an open economy like free flow of foreign capital into the country and avoid the risks involved in fluctuating market fortunes.

At a time, when all the countries in the world have come out of the trance of free market economy, and every country is debating fiercely how to protect home markets, for India to declare that it is the most open economy sounds a little quixotic. It is not the fault of Modi that he does not understand the problems of a free market economy, but it is the failure of the economic experts in the government if they are not placing on the table the complications and challenges.

Of course, the true test of Modi’s and BJP’s free market credentials would depend on whether they would open up the multi-brand retail or not. The stand so far seems to be that it is a no-go area. The Modi government then is not as open about the open economy as it claims to be.

The other myth that Modi and Singh subscribe to is that FDI will be the key to boost economic growth. Modi also believes that it will create jobs. This is a hypothesis and it remains to be tested. As a matter of fact, Modi’s fond hope that it will pull the Indian economy out of the doldrums of seven percent growth rate can turn out to be a disappointment. There are two reasons for this. First, the purchasing power of the Indian consumer is not very high, going by the per capita income figure of around Rs 90,000, which will be around US$1200. To argue that India has come a long way from the 1960s would not hold water. The Indian per capital income has to be judged by the purchasing power at home and abroad. It might appear to be substantial enough at home, which is to be tested against the cost of living index. But it is certainly weak in global terms.

FDI cannot save the Indian economy. It is one of the essential components of a developing, middle income economy like that of India. But it cannot carry the burden of keeping the Indian economy afloat or of pushing it higher and higher.