12:00 AM, October 10, 2012 / LAST MODIFIED: 12:00 AM, October 10, 2012

Why India's FDI policy is opposed

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Vasabjit Banerjee

Given that the ultimate aim of every Indian politician is to be re-elected, their opinion about the Manmohan Singh government's policy of permitting foreign direct investment (FDI) is contingent upon how the policy affects their vote share.
Elections also require spending resources to retain the loyalty of party leaders and acquire new supporters and leaders, apart from large sums of money for campaigning. This necessity of resource acquisition means that regional politicians' stances on FDI depend on whether (and to what extent) they can leverage this stance to acquire resources or not.
However, the election-centric calculation in turn depends on the level of economic development in a state and the characteristics of its major economic sectors. As a result, if the electoral and economic factors are accounted for, then West Bengal Chief Minister Mamata Banerjee's position on FDI becomes increasingly clear and rational.
The first issue of resource acquisition is a short-term one. Banerjee needs resources from the central government to retain popular support, in order to win the legislative Assembly and parliamentary elections.
Resources extend from outright forgiveness or extension of repayment periods on debts owed to the central government to increased investment in infrastructure projects and public sector industrial units in Bengal.
Such resources can help maintain social welfare programmes and generate employment. They can also perhaps aid local contractors and businessmen who have been the financial backbone of many regional parties.
The furor over FDI offers Banerjee a salient issue, worth millions of dollars in alleged kickbacks to senior politicians in Delhi and their allied lobbyists, which she can use to extract central funds.
Though one Indian newspaper notes that Banerjee actually stands to lose Rs.23,000 crore, it also notes that the funds would have paid the state government employees; but the political reality is that the beneficiaries of these funds are generally Communist Party of India-Marxist (CPI-M) loyalists, such as teachers and labourers in the Public Sector Units.
Rather, Mamata Banerjee wants funds for her own projects and her high-stakes challenge is based on a calculation that her party's 19 seats have made it indispensable to future parliamentary coalitions.
Thus, even if the present government were unwilling, future coalitions headed by the National Democratic Alliance would be more amenable to giving her funds with poor conditions. In fact, Abhijit Mukherjee's unopposed election in Jangipur also implies that a future rapprochement with the Congress is possible.
Banerjee's possible second concern is her knowledge of the present condition of the West Bengal economy. In terms of the level of economic development, West Bengal is woefully behind the major industrialised states of India.
Newspaper reports have noted declines in West Bengal's share of the national GDP from the early 80s to 2010, a decline in per-capita income relative to the national average during this period, and a stunning decline in the share of the industrial sector in the state's economy from the mid-1990s to till 2010.
The facts of de-industrialisation and a corresponding fall in income are well known. Furthermore, these factors did not affect the CPI-M's peasant oriented strategy until the mid-2000s because the CPI-M sought to freeze this peasant support base through interlocking schemes in rural property-rights, distribution of resources, and voting behaviour to perpetuate itself in power.
The CPI-M grand coalition fell apart when the Buddhadeb Bhattacharya government broke this peasantisation strategy by threatening the status-quo on land ownership and usage based on an effort to re-industrialise the economy.
Banerjee has inherited a deeply different state than the CPI-M did in 1977 when West Bengal was an industrial economy capable of transforming peasants into factory workers.
Today, Bengal is an agricultural economy consisting of small-scale peasant producers who produce enough to subsist with a little surplus that can enter the market. Between the peasants and the consumers in the urban areas, there has developed in the meanwhile a large chain of intermediaries. These can be petty traders buying from peasants, accumulating the produce, and bringing it to large wholesale urban markets.
After that, a set of small grocers and traders sell the produce in numerous retail outlets. This informal economy has prevented mass unemployment, lowered the population pressure in the rural sector, and provided smoother access to agricultural produce to urban consumers.
Banerjee is perhaps afraid that the large box stores with independent distribution networks, that FDI in the retails sector entails, will destroy this intermediary class of petty traders, merchants, and small shopkeepers.
Without any corresponding expansion in the manufacturing sector, and a large segment of the young population denied entry into the service sector in Bengal and other states due to the CPI-M's disastrous Bengali-medium educational strategy, the displaced population cannot be socio-economically integrated.
A scenario of post-Partition radicalisation headed by displaced peasants and lower middle classes from East Pakistan, similar to the one exploited by the Communists in the 1950s and 1960s, can consequently reoccur.
In light of her political fears, Banerjee's stance against retail FDI is justifiable. However, West Bengal cannot feed and clothe her millions and provide honourable avenues for socioeconomic advancement without re-industrialising itself. Such re-industrialisation implies the smooth availability of cheap goods and services in urban areas, not just in Kolkata, but in smaller cities such as Darjeeling, Kurseong, Kharagpur, Asansol, Durgapur, to name a few.
Thus, partial introduction of FDI in the retail sector, restricted to urban areas and in certain sectors, will allow us to go back to the front.

The writer is a post-doctoral research fellow at the department of Sociology, University of Pretoria, South Africa.

© The Statesman. All rights reserved. Reprinted by arrangement with Asia News Network.

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