Since foreign investment usually brings with it advanced technology, it increases the productivity of capital, lowers the capital output ratio that raises the rate of growth further. The higher growth of output increases employment, raises the total revenue and the availability of resources to the government, with the same rate of taxes and the same fiscal to GDP ratio. The government may deploy these additional resources on social development and anti-poverty programmes. The reforms then are perceived as not only increasing output but also as benefiting the poor and the unemployed. Reforms thus become successful as well as sustainable because they become popular and acceptable to the majority of the people.

Why then, does foreign investment generate so much controversy and opposition in a country like India? To some extent the opposition comes from domestic vested interests and business enterprises that are threatened by increased competition. But it does not explain fully the opposition to foreign investment without a base of popular sympathy for domestic business.

One cannot also say that Indians are generally xenophobic and, therefore, are intrinsically anti-foreign investment. Indeed, the average Indian consumers' preference for foreign brand names is one of the reasons for the Indian businessmen's complaint that foreign companies enjoy an undue advantage of monopoly rent in segmented product markets. They could take on forcing competition easily and willingly if it were based entirely on product quality undifferentiated by brand names. They would also complain that foreign companies often enjoy an undue advantage in the supply of finance. Foreign companies have their own sources of finance from assets of the parent companies and the financial institutions and commercial banks also are often biased in their favour, giving them easier if not cheaper access to finance. If either of these complaints is true, domestic business appear not as vested interests but as indigenous entrepreneurs being pushed out of business by unfair competition.

Opening up to foreign investment, like any policy of deregulation and liberalisation, should be complemented by appropriate policies to ensure competition. They must be prevented from taking advantage of an initial monopolistic strength in finance or in input and output markets to undercut potential competitors. It may, therefore, be quite legitimate for the government to be cautious about allowing the use of brand names especially for consumer products and imposing a reasonable charge or tax on such products. It may also be justified to insist that foreign investors go for joint ventures with domestic business or some substantial domestic participation in industries that do not use much advanced technology or do not engage in exports, particularly, in new markets. Otherwise, in high technology and infrastructure or export industries, there should be no bar to access to foreign investment even up to 100 per cent ownership. The benefits to the country would be large enough to compensate for the cost ofpossible displacement of domestic companies.

This implies a tacit acceptance of a principle that other things being equal, domestic companies will be given preference over foreign companies in operating in India. From the point of view of narrow economics, this may appear to be irrational not supported by the calculus of costs and benefits. pIf an enterprise is operating in India, employing people and adding value to the materials in establishments located in India, all the benefits of its operation accrue India, irrespective of whether it is owned or managed by non-Indians. There will be some repatriation of profits and executive salaries to non-Indians but that will be less than the value added in India, enabling the country to enjoy a net benefit. In most cases, domestic investments even when they are displaced in certain areas by the competition from foreign companies will not be utilised. They will be employed in alternative operations and whether or not those operations are as profitable as before, the country will have a net gain from the inflow of foreign capital. Only when there is a fall in domestic savings so that there is no addition to investible resources, the GDP growth may not rise and the country may not have a net gain. But if that happens, it would reflect more on the failures of policy than on foreign investment especiallywhen it is direct investment.

In a country like India, an across the board, open door policy for foreign investment will meet with serious resistance if the impression is created that domestic industry is getting an unfair deal and is being displaced by foreign investors who are not obviously superior. The reason behind this is our history and the consensus around our national movement against foreign domination. For a long time, Gandhiji's swadeshi movement propagated a rejection of products as a symbol of foreign economic exploitation. Nehru's call for self- reliance was directed not so much against foreign trade as against dependence on foreign aid and foreign capital and in favour of building up indigenous capacities. As the period of colonial rule and movement for national independence recede into history, the appeal of such sentiments will weaken, especially for the younger generation.

If it can be seen that foreign investment allows an economy to grow at a much faster rate than before and that higher growth rate provides larger resources for social development, for poverty eradication and reduction of unemployment and better provision for education, much of the opposition to foreign investment will disappear. It is not the nature of foreign investment as much as our failure to design our reforms properly that has been responsible for the persistent resistance to foreign investment. We allowed foreign investors to come quite freely in consumer products and high profile industries in a protected market where domestic business could function quite effectively. But in infrastructure and high technology industry, our reforms have been tardy, procedures have remained archaic and bureaucracy has been festering-all resulting in a very slow intake of foreign investment which, naturally, came to be identified with soft drinks, fast foods and high fashion consumer products rather than withelectricity, telecommunication, ports and transport.

Reforms, Equity and the IMF: An Economist's World by Arjun Sengupta; Har-Anand Publications; Rs 495; Pp 320