Archive for November, 2012

FDI IN STOCK MARKETS, MANUFACTURING & RETAIL: WHERE WILL THE DOLLARS COME FROM?

Saturday, November 3rd, 2012

FDI IN STOCK MARKETS, MANUFACTURING & RETAIL:

WHERE WILL THE DOLLARS COME FROM?

By

Bhaskar Sarkar

Website: www.bhaskarsarkar.com

Author Profile: http://www.smashwords.com/profile/view/Bhaskarsarkar1940

Our learned Prime Minister, Finance Minister, Chairman of the Planning Commission and most economists believe that India cannot survive without foreign investment. To an extent this is correct. Developing countries need investment in developing infrastructure and industries. The remarkable growth rates achieved by the Asian Tiger economies of the 1990s, China and India are largely due to the billions of dollars of investment that came into these countries in infrastructure, real estate and manufacturing. But these investments were not made with the aim of helping these countries. Some of the investment in infrastructure came from financial institutions like the World Bank and Asian Development Bank. But the major investments in real state and manufacturing were made by private investors or multinational corporations in search of profits which they cannot earn by investing in the developed countries.

Foreign investments are in essence of two types:

  • Foreign investments in the stock markets of the developing countries.
  • Foreign investment in setting up manufacturing or marketing facilities through establishment of subsidiaries of multinationals or in collaboration with the domestic industries.

Foreign Investment in Stock Markets

Foreign investments in the stock markets are fairly liquid funds. The foreign financial institutions can sell their holdings at any time and take away the money. Hence this kind of foreign investment is known as “Hot Money”. Today’s technology allows flow of billions of dollars from one country to another at the press of a button. The out flow of hot money reduces the foreign exchange reserves of the country. If the outflow is large it affects the foreign exchange conversion rate. In the free market system, the value of a currency is determined by its demand and supply. Out flow of “Hot Money” generates a large demand for foreign currency in a short period of time and at the same time reduces supply. The outflow of “Hot Money” can lead to devaluation of the local currency. Mr. Jagdish Bhagwati of Colombia University has pointed out, “ In 1996, the total private capital inflows to Indonesia, Malaysia, South Korea, Thailand and the Philippines were 93 billion US $, up from 41 billion US $ in 1994. In 1997 that inflow suddenly changed to an outflow of 12 billion US $.” This small outflow was enough to trigger the collapse of South East Asian economies in 1997, a collapse from which these countries and the world took seven to ten years to recover. The dangers from existence of “Hot Money” in our economy are there for all to see.

Foreign investments in the stock market of developing countries tend to create other problems. Such investments create a situation of too much money chasing too few shares. The share prices get a boost, not due to any improvement in the fundamentals of the scrip’s or performance of the companies, but simply because of additional liquidity in the market. This results in a bubble. Local fund managers are happy because they make some quick money. But in the long run, when the funds move out due to any reasons whatsoever the bubble bursts. The share prices crash. This hurts a lot of investors and results in a loss of investor confidence. The South Korean composite index fell by about 50 % between  July 1997 and September 1998. The Thai Stock Exchange crashed by over 66 % in the same period. The Jakarta composite index also fell by more than 50 % in the same period. 17 Billion US $ were invested by foreign investors in the India stock exchange in 2007. It pushed the Bombay Stock Exchange Index (BSE Index) from about 10000 points to 21000 points. In January 2008, the foreign investors withdrew about 4 billion US $ from the market resulting in a 4000 point fall in the index. The fall continued till the BSE index fell to about 13000 points. Many small investors, mutual funds and speculators have been badly hurt. Another large sell off by foreign investors could cause a crash of the India Stock Markets and result in turmoil in the banks and financial services in India.

There is another effect of short term foreign investment in the stock market that needs to be considered. The funds are invested to make profits. These profits have to be repatriated in foreign exchange every year to pay dividends to the investors. This generates an outflow of foreign exchange which is over and above imports. This makes it imperative on the Indian governments to earn more foreign exchange in real terms than what is required to meet the cost of unrestricted imports. That is quite impossible. In fact, India has a ballooning current account deficit.

Short term foreign investments in the stock exchanges of the developing countries are, at best, a mixed blessing. At the worst, it can result in a national economic disaster. Indian Government and economists need to take note.

FDI in Manufacturing and Retail

Uncontrolled direct foreign investment can also create problems. Between 1992 and 1996, more than 100 billion US $ were directly invested in the Asian Tiger economies. A large part of the funds went into creation of real-estate and setting up of factories or ship yards. Unrealistic ambition and availability of easy money led to unrealistic projection of demands. Over capacities were created in all industries. There were no buyers for the surplus real-estate. Real-estate prices crashed in Malaysia, Thailand, South Korea and the other Asian Tigers. Unfinished sky scrapers dotted the skyline of Jakarta, the capital of Indonesia when the author visited the country in 1999. The Hyundai shipyard in Korea does not have enough ships to build. There is over capacity in production of cars, consumer durables, electronics and almost every other item. Sales and bottom line of many companies dropped. The companies were unable to pay back the investors. The boom days saw a huge increase in employment and per capita earnings. This led to uncontrolled spending and imports. Once the downturn started, it snowballed into an international economic crisis where everyone has been hurt. There was deflation and recession. The unemployment rose. Dreams were shattered. It took the Asian Tigers about 10 years to get out of the mess created by the meltdown of 1998.

The foreign investors invest in a developing country to make profits. They choose the sector in which they want to invest. Naturally they want to invest in low risk, low gestation, low investment, high return areas like single and multi brand retail. Their imports create over capacities. There is unhealthy competition. Some Indian companies are bound to perish, bringing in misery to the investors and employees.

There is also the foreign exchange problem. In small developing countries, the multinationals set up export oriented units to take advantage of the cheaper labor costs and favorable exchange rates and export to the developed world. This is beneficial to the developing nation as there is increase in exports. But in large countries like India, China, Indonesia, the local market is what the foreign investors want to exploit. This is not always beneficial to the developing country as it harms the domestic industries and can create over capacities.

The goods and services produced by the multinationals are sold in the local currency but profits are repatriated in dollars. This results in an additional drain on foreign exchange reserves of the developing country and puts pressure on the currency.

Conclusion

Most of the leaders, economists and media persons tend to ignore the foreign exchange management problems associated with foreign investment. Some believe that, like in a Ponzi scheme, more foreign exchange investments will generate the foreign exchange required for repatriation of profits. Some are interested only in their short term political or economic gains and somehow solving the current problems created by low foreign exchange reserves. Others simply believe that they would not be around when the problems begin to manifest themselves and the opposition party would have to face the crisis situation.

FDI in retail is a recipe for disaster. 70 percent of the products sold in these stores will be imports. We already have a serious problem with trade and current account deficits. Where will the foreign exchange for the increased imports come from? Rupee slid to Rs 57 to the dollar a few months back. If we continue to liberalize and allow FDI in retail the Rupee will slide to over Rs 100 to the US dollar. Oil prices will rise to double of today’s prices. It will be an economic disaster.

Who Will Save India??

Thursday, November 1st, 2012

WHO WILL SAVE INDIA??

Bhaskar Sarkar

Website: www.bhaskarsarkar.com

Author Profile: http://www.smashwords.com/profile/view/Bhaskarsarkar1940

“Yada Yada Dharmashy Glanirbhabati Bharata!

Abhuthanamdharmashy Tadatmanang Srijamyahan!!

Paritranaya Sadhunang Binashaya cha Dushkritam!

Dharmasthapanartha Sambhabami Yuge Yuge!!

Geeta Chapter 4; Slokas 7 & 8

The above ‘Slokas’ mean “Whenever spirituality decays and materialism is rampant in India; O Arjuna, I reincarnate myself. To protect the righteous, to destroy the wicked and to establish the kingdom of God, I am reborn from age to age.”

A time has come when any intelligent and patriotic citizen has a right to be alarmed at the state of affairs in India. As of today, it is my personal opinion that our political system as reached a nadir. The political ethos of today must be tormenting the souls of the freedom fighters who gave their lives to see an independent India, a vibrant, progressive, strong India. Our educated youth, who are the primary stake holders in India’s future, must also be dismayed and wondering about their future.

India is in the top 20 most corrupt countries of the world. Massive financial scams involving trillions of Rupees in allocation of coal mines, oil blocks and spectrum have surfaced. Government land is given away to the politically connected at a minute fraction of their real value in contravention of the law of the land. Investigating agencies are being used to protect the politicians in power and their relatives and cronies while opposition politicians and whistle blowers are targeted. In an unprecedented move, the US daily, Washington Post, published a sharply critical article on the Indian political leadership, the Congress Party and India itself. About the present Prime Minister, Mr. Manhohan Singh, it wrote, “India’s silent prime minister becomes a tragic figure…… a dithering, ineffectual bureaucrat presiding over a deeply corrupt government.”

Many political parties are controlled by dynasties. The Nehru-Gandhi family rules in the Congress, the Badals rule the Shiromani Akali Dal, the Chauthalas rule the Haryana Vikas Party, the Thakres rule Shiv Sena, Devegowdas rule JD (U), Mulayam Singh Yadav and his family rule the Samajwadi Party and so on. There are credible allegations of corruption and nepotism against these families and political leaders like Laloo Prasad Yadav, Ms Mayabati, Bhupinder Singh Hooda amassing wealth far beyond their known sources of income. There is no accountability and investigations and prosecution drag on for decades till the old misdeeds are buried under new ones.

The Governments stand paralyzed by internal contradictions and conflicts of sectarian interests. The law and order in most states is so bad that ordinary people, particularly women, are unsafe. Police who are supposed to protect the people rape women including their female colleagues in police stations. Suspects of minor crimes are beaten to death in trying to extract money. False cases are used for extracting money or favors. Looting the Government treasuries, misappropriation and destruction of public property continues unabated. Governments at center and states do not bother to implement court orders for years. There is no accountability at any level. All Government servants including those employed on essential services like oil sector, transport and banking go on strike and hold the country to ransom. Agitators block trains, burn government properties and beat up police personnel. Millions of tons of food grain is exposed to weather and allowed to rot while millions of the poor go hungry. The Government just refuses to act. It is indeed a sad state to be in the 65th year of independence.

The Parliament has become a farce. The only issue on which our parliamentarians show unanimity is when it comes to increase their own emoluments and perks. The parliament sittings are reducing every year. There is hardly any debate. The members behave in the most undignified manner and egoistic manner.

It is not that people do not know what is wrong. Civil society leaders like Anna Hazare and Baba Ramdev have been holding fasts and agitations. Hundreds of thousands of their supporters, members of “India Against Corruption”, have held protests in almost all cities of India. Millions of words have been written and spoken in the media about corruption in high places, about the nexus between the politicians and the criminals, about dividing the country on caste and religious lines in the search of votes that would allow a party to rule the country and enjoy the perks of office. Television channels show advertisements asking people not to vote for criminals and other unsuitable candidates. The right things cannot be done, harsh measures cannot be taken because it may cost votes or annoy coalition partners who are indispensable. The possibility of economic slavery under the developed nations and their multinationals looms large on the horizon.

The situation is perhaps worse than what prevailed when the sons of Dhritarashtra ruled Bharat. Are we going to wait for God to come and deliver ourselves from evil? Or can we try to fight evil in our own little ways?

à        Can the honest politicians and the civil society forget their political leanings and loyalties and come together and assist Kejriwal in saving India?

à        Can the President of India declare internal emergency, dismiss the government, improve law and order and order fresh elections?

à        Can the people of India forget caste and clan loyalties and elect honest and capable people to govern themselves?

Anna Hazare and Baba Ramdev may be honest. But they are not politicians. You cannot win battles on valor alone. You need good general or leaders, you need an organization and you need a viable strategy. Can the honest people of India, political leaders, intellectuals and professionals, the youth and the aged forget their egos and come together and support Kejriwal in his efforts to clean up our political system? Kejriwal may not be Lord Krishna but he seems to be the only hope at this moment.