We need FDI, not kickbacks

One may wonder what imports have got to do with corruption. Well, plenty. Over-invoicing of imports and its adjunct, kickbacks, are often linked to import transactions.

In fact, the Bofors saga was all about alleged payment of kickbacks to our politicians through sundry businessmen.

The recently deceased Italian businessman Ottavio Quattrocchi, allegedly close to the Gandhi family, was, according to Swedish Radio, paid around $23 million by the Swedish gun manufacturer Bofors by way of winding up charges for swinging the deal in its favour.

The opposition parties in India strongly believe that “winding up charges” was a euphemism for kickbacks, for which the nation was made to pay an inflated bill.

The real motive

Bofors was not the first instance of kickbacks, nor will it be the last. It is common knowledge that it is de rigueur in India in the case of imports made by both private sector companies as well as by Government.

The bulk of black money stashed away abroad, belonging to politicians and industrialists, comes under this category.

Indeed, we have a strong penchant for import of capital goods, for which quality is only a fig leaf, with the real motive being the desire to make money at the expense of either the taxpayers or the shareholder, depending on who the importer is — Government or private sector company. Foreign companies, eager to bag contracts, play ball in a spirit of mutual back-scratching.

Coming back to the issue, does FDI put paid to the vaulting ambitions of our politicians, now that what was hitherto imported is going to be made in the country itself?

The answer is a resounding “No”. The chairman of Sony Corporation once famously remarked that he liked the Indonesian variety of corruption vis-à-vis the Indian one because President Suharto took entry fees but cleared the decks for a smooth operation, whereas in India there was no one-time entry fee, instead palms needed to be greased time and again.

The moral of the story is if imports tantalise the importer with prospects of kickbacks, FDI tantalises the powers-that-be with the prospect of entry fee.

Impact on the rupee

Can FDI apply the brakes at least on imports and shore up the value of the rupee?

The answer is a resounding “Yes”, though it is doubtful if foreign moolah will start pouring in the moment FDI limits are hiked for certain sectors. To be sure, FDI is what the doctor ordered long ago for a developing economy like India.

China catapulted itself into the numero uno position for s exports on the back of FDI coupled with aggressive cost-cutting, aided by near-starvation wages.

The surging FDI should have sent the valuations up as far as its currency, the yuan, was concerned, but it deliberately courted lower valuation to give a leg-up to its exports. Imports guzzle foreign exchange, which explains our present huge current account deficit.

FDI, on the contrary, brings the most durable form of foreign capital, along with superior technology lacking in a developing nation, besides providing greater employment opportunities, better infrastructure and greater revenue to the exchequer by way of taxes.

Not making the grade

But foreigners do not rush in unless there is something tangible for them on the horizon.

Foreign telcos are not going to fall over themselves now that the FDI limit has been upped to 100 per cent from the present 74 because, already, there is dog-eat-dog competition out here.

Foreign retail chains did not rush in, because of the political uncertainties they faced.

If bureaucracy and the economy-ecology debate could send our own captains of industry scurrying abroad, it would be futile to expect foreigners to rush in. For foreign companies to make India the export hub, the infrastructure must be ship-shape and wages low. On both these counts, we fail to make the grade.

Needed, more transparency

The leitmotif of the recent FDI hike is case-by-case approval beyond a certain threshold. This portends more corruption.

While power corrupts, absolute power corrupts absolutely and discretionary power corrupts the most.

The Government would do well to replace the opaque case-by-case approach with a transparent guideline. For example, foreign oil and shale gas explorers could have been told that they are welcome to own the entire equity but would have to share, say, 60 per cent of the production with the Indian Government, with the CAG keeping a hawkish eye on actual fulfilment of production-sharing obligations.

Till we get our act together, our hope on the forex front, especially in shoring up the value of the rupee, lies in more and more counter-trade.

The counter-trade with Iran happened through happenstance — Iran would be supplying us oil which would be paid for through matching exports, with both the transactions being valued in Indian rupees.

Such deals considerably ease pressure on the beleaguered currency.

It is estimated that as much as a quarter of the world trade is through counter-trade, despite the WTO frowning upon it.

There is no reason why we should not get on the bandwagon.

(The author is a New Delhi-based chartered accountant)