The Problem with India

This post is written in the afterthought of reading a post written by Mr R Balakrishnan on foreign investments in India.

Link: https://balablogsdotcom.wordpress.com/2018/08/07/the-search-for-large-investments-by-funds/

Bala, great piece as usual. The problem here is more structural, in that we are a net importer by a huge margin. Usually, when imports and exports are balanced, the FOREX earnings from exports cover the FOREX spending from imports in the country’s net account. But when imports are disproportionate, the importers buy FOREX indirectly in the international markets, and as domestic currency is accumulated in the international markets its value is diminished due to demand, supply dynamics.

As this domestic currency changes hands in the international markets, it needs to find a way back to the country of its origin, as it is useless in every other country, only unless it is the reserve currency.

Now to avoid, large-scale currency devaluation the domestic government has to either buy this domestic currency held by foreigners or provide avenues for that domestic money to come back to the country in the form of investments. Such investments create artificial demand for the domestic currency.

In case of the US and China, we see America giving up its Real estate and shareholdings in companies to provide that investment avenue to the $ held by the Chinese. $ being the reserve currency helps the Chinese buy-up assets all over the world as well.

In our case, I do not have the figures for foreign investment in the Indian Real estate but most of it goes into shareholdings of listed companies or set up of new businesses.

While what you say is possible, that foreign companies earning their profits from India should provide avenues for Indian investment into them. It is not as easy as letting Indians open foreign investment accounts with Interactive Brokers and investing in these companies. Such investments would only escalate the currency demand-supply dynamics that I have discussed above.

Forcing companies to list their shares in domestic currency terms is a way out but I find it highly divergent from a free market perspective.

Instead of forcing laws on someone, which is the easy way out, we should be focused on balancing our imports and exports better. This will remove the need for foreigners to invest in our domestic assets.

While increasing our exports to match our imports is a tall order given the foreign competition in foreign markets, I believe it is much easier to provide import substitution for our imports.

As for foreign companies benefiting from our consumption story, an easier domestic to foreign investment policy to facilitate such avenues for every Indian will be the best solution and with no pressure on the currency from import, export imbalance such remittances from India to abroad will not add to the pressure already faced by our currency.

The talk over the last few years has been to grow by following the example of our Asian neighbours, Japan, South Korea & China by exporting our way to prosperity. But better than growing through exports in a highly competitive market, we should first aim to be self-sufficient in a domestic market where we should have a better competitive edge.

Our population provides us with the means to reach manufacturing economies of scale in all products. Once we are self-sufficient, we can think of competing against others in foreign markets. If we cannot compete with them on our home turf what chances do we have in a foreign place with global competition?

But sadly, the situation is such that we need to protect our domestic industries with customs duties. Which is a stop-gap solution at best. In some cases, even after a labour-intensive product is manufactured in a high capita country, with added logistic costs and customs duties, the imported product is still cheaper than our domestic product.

We have added inefficiencies after inefficiencies in our production value chain by subsidizing the citizens and penalizing the industry. A few examples are the differences in power costs, freight vs passenger costs in railways. The industry is always seen as a scapegoat to fund the political ambitions of those in power.

Government after government tries to fund their subsidy programs by penalizing the industry through irrational pricing of inputs such as mines, ores, spectrum etc, inadequate infrastructure spending and thoughtless lawmaking to gain popularity. While our competition provides special concessions for the same to help grow the nation as a whole.

In the end, it all comes down to the kind of people we are. We expect dole outs from our elected leaders for our personal short-term gains. We never ask what will the representative do for our country we only ask what will they do for me, my family, and my community.

Someone has said it best, “the citizens get the politicians they deserve.”

This is how I see it, all our problems are interconnected and no one measure will help solve the imbalances. It is like the traffic problem, if we solve the traffic snarl at one junction, we find that the problem has shifted downward to the next junction.

There is no easy way to build a nation, a nation the size of ours requires planning and effort from all its citizens. But most of the measures that I have recommended have intangible results with positive externalities that are distributed to everyone over the long-term. But no one wants that, impatience for short-term selfish benefits and results create negative externalities that are distributed to everyone over the long term.

In the end, I feel we Indians must be born with some special kind of selfish gene to see our nation rot in so many ways and still not mend our ways.