The Hindu Business Line : WHY FDI IS THE BEST BET

The US President, Mr George W. Bush, is not likely to forget his trip to India for a long time not the least because India counts among those few countries where he was warmly welcomed. A protest demonstration of over a lakh people in Mumbai caused citizens more inconvenience than it even registered on the American President's radar screen. Predictably, Mr Bush took the occasion to cement friendship between the two countries, agree to some nuclear deals and, of course ask, in the bargain, for a more open economy. Speaking at Purana Qila in New Delhi, Mr Bush reminded India that it had "responsibilities", the chief one being to "lift caps in FDI, make rules more transparent and open the market for agricultural goods and other consumer products." The bonhomie developing between the two countries perhaps allows the US President to tell this country what its "responsibilities" are but the underlying sentiment is of a piece with attitudes of the developed countries and the US, in particular, to pass off suggestions as `conditionalities', indispensable conditions for growth that lead to what scholars have described as the restriction of `political space' for indigenous policymakers.

It is unclear to whom India bears this "responsibility"; presumably to itself and world trade and prosperity. Indian policymakers will read into the text what they think is best suited for the country adhering to the belief that politics is a game of give and take. The US has been our best trading partner, discovering India as a great outsourcing hub. Opening up the economy to more FDI is good for the sectors that need dollops of investment, and the Finance Minister made that amply clear at a conference on India-US economic cooperation. Placing the issue in perspective of the current growth rates of 8 per cent, Mr P. Chidambaram used the platform to address businessmen accompanying the American President on the areas of potential investment. In keeping with the spirit of the Budget, he pointed to the need for investments in core sectors such as power that would be necessary if the country was to ramp up its growth to 10 per cent.

The Finance Minister also addressed a constituency that was not there — the opposition to FDI. To achieve a higher rate of growth in the Indian economy would require a 30 per cent investment rate, a prospect that was not feasible given domestic rates of savings and investment that fell shy of that figure. The balance had to be met by foreign investment. In effect, the Finance Minister made foreign investments in power sector a necessary condition for a movement up the growth ladder. With the budgetary allocations now focusing almost entirely on the social sector and subsidies, the Government's capacity to fund infrastructure will be hampered severely. The fiscal deficit is now at prudent levels though the huge outlay for the social sector may turn unproductive and thus widen the deficit. For that reason alone FDI seems the best bet under the circumstances even if Mr Bush tells us so.

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