Who's afraid of liberalisation?

SWOT

Amidst the din of argument over whether India should lift the barriers to foreign investment faster, there are signs that pragmatism is steadily winning over confused idealism.

Earlier this week, my colleagues P Vaidyanathan Iyer and Sidhartha reported that the government is thinking of partially opening the retail sector to foreign direct investment (FDI).

The ostensible reason that the commerce ministry gave was that the move made sense since several retail chains already operate in India through franchisees anyway (nobody would admit to US/EU pressure, though this was certainly a factor).

Just as with other sectors, FDI in the retail business has been an emotional issue, not least because this government is worried that it might upset the vast trader community that constitutes a sizable vote bank. This, of course, has never been stated upfront; the contention was always that Indians would lose jobs.

In this context it was significant that a commerce ministry source said, "If you go by the evidence that is available to us, there is nothing to suggest that McDonald's has got foreigners to serve at its outlets or Nokia is getting its foreigners to sell its phones."

He could well have said the same thing about any of the services sectors that have been liberalised either fully or partly. Telecoms, insurance, banking, infotech, hotels, broadcasting "" even a casual mental run-through of these sectors will reveal the striking fact that there's been no invasion by foreigners.

On the contrary, it is Indians who have benefited. BPO is the most prominent case in point. A McKinsey study entitled 'The truth about foreign direct investment in emerging markets' shows that wages in the BPO business are "50 to 100 per cent higher than other white-collar jobs requiring similar skills".

The growth-and employment-enhancing benefits of greater liberalisation was one of the key points of a persuasive presentation on 'India and the WTO' by World Bank economist Aaditya Mattoo, organised in conjunction with Assocham, last week.

The presentation explained the broad points of an eponymous book edited by Mattoo, who has also worked in the WTO secretariat in Geneva, and Robert Stern of the University of Michigan.

The burden of Mattoo's argument was that India not only had a "huge stake in access to foreign markets," but that the "striking gains from reform strengthen the case and constituency for further reform."

This much is obvious at the intuitive level, but Mattoo presents compelling evidence of how India stands to gain by liberalising services "" to name just one sector "" faster.

As the first chart shows, the fastest growth in the 1990s has come from sectors that have liberalised significantly. Not surprisingly, it is these sectors that have recorded the maximum growth in employment between 1993-94 and 1999-00.

India has, in fact, been the leading performer in terms of growth in services exports over the nineties "" clocking a growth of 17.3 per cent compared with 15.3 per cent for China and a world average of 5.6 per cent.

The implication of Mattoo's presentation was that there are "powerful arguments for a pro-active engagement in multilateral negotiations" and these, rather than sole considerations of reciprocity, should govern India's policies.

Certainly, the wider benefits of jobs and growth if deep-pocketed chains like Carrefour or Wal-Mart, which has already begun to source from India, were to set up base in India can only be imagined.

Pramod Bhasin of GE Capital India once talked about the spin-off benefits of the booming BPO business in terms of the spending power it has put in the hands of young people. Retailing is also a young people's business, so the benefits only stand to multiply.