Who needs MNCs?
In this day and age when India is all set to be a player on the global stage and has 'liberalised' its economy progressively from 1991 such a topic seems antediluvian and almost irrelevant. Actually its neither. In our haste to become more liberal than the West we seem to have forgotten our own interests.
An article in the Economic Times dated April 8, 2013 stated:
"In December 2009, the RBI removed the cap on outbound remittance of royalty on trademarks or brand names of foreign companies or partners, which was earlier limited to 5% of domestic sales, and 8% of exports. These companies wasted no time in hiking the royalty for their Indian subsidiaries. Even firms like Gillette India, 3M India and Hindustan Unilever, which were not paying any royalty, started doing so from the same financial year. The rationale for the hike was that the Indian subsidiary should pay more for its 'access' to the parent company's capabilities and use of its brand name."
The situation in the Pharmaceutical sector is even more poignant. In his book, External Dimensions of an Emerging Economy, India edited by Byasdeb Dasgupta (Link) some facts about the major Pharma companies operating in India have been brought out:
Net Forex Earnings from the top 10 Pharma MNCs operating in India declined by 15% per annum between 1994 and 2010Dividend Remittances in US$ for the same group of MNC companies rose by 16% per annum during the same period.Net Forex Earnings from the top 10 Pharma INDIAN companies rose by 29% per annum during the same period. I would like to make a case for limiting the foreign shareholding and capping royalty and dividend flows for MNCs operating in India. The argument goes as follows:
Many MNCs operate in low tech areas of the economy. For example Unilever, Nestle or Reckitt Benckiser. One may argue that India really does not need technology for soaps, noodles or toilet cleaners. In fact these MNCs actually contribute to raising consumer prices due to their abnormally high marketing spends and overhead costs. Equivalent products from Indian companies are just as good if not better. It is really unreasonable to pay royalty in addition to dividend for the dubious advantages of using MNC brands in our bathrooms and homes.Some MNCs actually market products that are bad for your health. Carbonated soft drinks, cigarettes and fast food are examples of this. Inspite of all the posturing by these companies that they are actually 'water neutral' or that they pay taxes on tobacco to the government exchequer the simple fact is that purveyors of such unhealthy products should not be encouraged and should certainly not be allowed to repatriate huge amounts of Forex dividends to foreign shareholders. It has been argued that Indian companies do not have the skills or cash to make required investments in the retail sector. Consider that the 3 largest retail chins operating in Russia are all home grown ahead of Walmart and all the others. Consider also that Reliance Retail has made a profit for the first time after 6 years. They are also the largest retail chain in India ahead of the Future Group. Consider also the huge pile of cash that Reliance is sitting on and it is not difficult to predict that they will take the lead in the Modern Retail revolution brewing in India. Walmart and others will be waiting in the wings while Indian companies steal a march on them. I therefore feel that FDI is not required in the retail sector. Indian companies will show the way in the next 10 years.India has the dubious distinction of being the largest importer of arms in the world. This is nothing to crow about as it is a significant drain on our Forex resources. A lethal combination of arms agents, corruption and a nexus between politicians, bureaucrats and foreign arms firms have ensured that Indian manufacturers (both public and private sectors) have been effectively stifled over the years. This nexus needs to be broken and it requires strong political will to do it. I doubt if either the BJP or the Congress has got what it takes.One of the most successful examples of liberalisation has been the telecom sector. Here again, leading players like Airtel, Reliance and Tata are all Indian. The only exception is Vodafone and as we all know there is a huge tax case pending against them (admittedly the government's doing but still). The fact of the matter is that the need for foreign expertise is sheer nonsense. If required it can always be bought at a price. A more nebulous argument put forth by protagonists of the MNCs focuses on the fact that these companies have helped in no small way in building management skills in India. This was a valid argument till about 15 years ago. In the interim period a plethora of well managed Indian firms have caught up. Their management practices are fully on par with the MNCs and in fact these companies are often preferred by young MBAs as places to work.This post has already become longer than my usual blogs. I could go on with further examples to bolster the argument. However, the simple fact is that India needs to look after its national interest while allowing foreign firms to operate in India. There is no template to follow. China, for example, makes its own rules and so does Russia. India is a big enough market for it to be attractive for MNCs to enter. But we should negotiate strongly on the terms and conditions and make sure that the 'level' playing field is tilted in favour of local firms.
An article in the Economic Times dated April 8, 2013 stated:
"In December 2009, the RBI removed the cap on outbound remittance of royalty on trademarks or brand names of foreign companies or partners, which was earlier limited to 5% of domestic sales, and 8% of exports. These companies wasted no time in hiking the royalty for their Indian subsidiaries. Even firms like Gillette India, 3M India and Hindustan Unilever, which were not paying any royalty, started doing so from the same financial year. The rationale for the hike was that the Indian subsidiary should pay more for its 'access' to the parent company's capabilities and use of its brand name."
The situation in the Pharmaceutical sector is even more poignant. In his book, External Dimensions of an Emerging Economy, India edited by Byasdeb Dasgupta (Link) some facts about the major Pharma companies operating in India have been brought out:
Net Forex Earnings from the top 10 Pharma MNCs operating in India declined by 15% per annum between 1994 and 2010Dividend Remittances in US$ for the same group of MNC companies rose by 16% per annum during the same period.Net Forex Earnings from the top 10 Pharma INDIAN companies rose by 29% per annum during the same period. I would like to make a case for limiting the foreign shareholding and capping royalty and dividend flows for MNCs operating in India. The argument goes as follows:
Many MNCs operate in low tech areas of the economy. For example Unilever, Nestle or Reckitt Benckiser. One may argue that India really does not need technology for soaps, noodles or toilet cleaners. In fact these MNCs actually contribute to raising consumer prices due to their abnormally high marketing spends and overhead costs. Equivalent products from Indian companies are just as good if not better. It is really unreasonable to pay royalty in addition to dividend for the dubious advantages of using MNC brands in our bathrooms and homes.Some MNCs actually market products that are bad for your health. Carbonated soft drinks, cigarettes and fast food are examples of this. Inspite of all the posturing by these companies that they are actually 'water neutral' or that they pay taxes on tobacco to the government exchequer the simple fact is that purveyors of such unhealthy products should not be encouraged and should certainly not be allowed to repatriate huge amounts of Forex dividends to foreign shareholders. It has been argued that Indian companies do not have the skills or cash to make required investments in the retail sector. Consider that the 3 largest retail chins operating in Russia are all home grown ahead of Walmart and all the others. Consider also that Reliance Retail has made a profit for the first time after 6 years. They are also the largest retail chain in India ahead of the Future Group. Consider also the huge pile of cash that Reliance is sitting on and it is not difficult to predict that they will take the lead in the Modern Retail revolution brewing in India. Walmart and others will be waiting in the wings while Indian companies steal a march on them. I therefore feel that FDI is not required in the retail sector. Indian companies will show the way in the next 10 years.India has the dubious distinction of being the largest importer of arms in the world. This is nothing to crow about as it is a significant drain on our Forex resources. A lethal combination of arms agents, corruption and a nexus between politicians, bureaucrats and foreign arms firms have ensured that Indian manufacturers (both public and private sectors) have been effectively stifled over the years. This nexus needs to be broken and it requires strong political will to do it. I doubt if either the BJP or the Congress has got what it takes.One of the most successful examples of liberalisation has been the telecom sector. Here again, leading players like Airtel, Reliance and Tata are all Indian. The only exception is Vodafone and as we all know there is a huge tax case pending against them (admittedly the government's doing but still). The fact of the matter is that the need for foreign expertise is sheer nonsense. If required it can always be bought at a price. A more nebulous argument put forth by protagonists of the MNCs focuses on the fact that these companies have helped in no small way in building management skills in India. This was a valid argument till about 15 years ago. In the interim period a plethora of well managed Indian firms have caught up. Their management practices are fully on par with the MNCs and in fact these companies are often preferred by young MBAs as places to work.This post has already become longer than my usual blogs. I could go on with further examples to bolster the argument. However, the simple fact is that India needs to look after its national interest while allowing foreign firms to operate in India. There is no template to follow. China, for example, makes its own rules and so does Russia. India is a big enough market for it to be attractive for MNCs to enter. But we should negotiate strongly on the terms and conditions and make sure that the 'level' playing field is tilted in favour of local firms.
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