India's Misplaced Hopes

A recent study casts extreme doubt on the contribution of foreign firms to Indian development. Meanwhile, a major vehicle for Indian business initiatives-the National Small Industries Corporation-faces government-created obstacles in its bid to compete with the multinationals.

Prime Minister Indira Ghandi unveiled plans in early September to attract more multinational enterprises to India by loosening restrictions on joint ventures and opening up new fields - most notably oil production-to foreign firms. Like many Third World governments extending hands to multinationals, India expects that foreign companies will bring much-needed investment, transfer superior technology and earn foreign exchange for its economy. A recent study by S.K. Goyal on multinational corporations in India refutes these notions.*

With a vast internal market and a large stratum of skilled personnel, India is arguably in an excellent position to bargain hard with foreign investors. Far from profiting from multinational investment, however, India has been providing substantial development assistance to the companies mostly U.S. and U.K. based-by furnishing local capital for their establishment or expansion.

Multinationals actually arrive in India with very little cash in their pockets. Sometimes the government has supplied them with low-cost loans in rupees or even hard currency. More often, through the policy of "Indianization" declared in 1973, the government has required multinationals to turn to - Indian businessmen for financial capital through the sale of shares in subsidiaries, generally deemed smarter investments than national firms. Although some foreign companies protested this policy, and Coca-Cola and IBM even decided to pull up stakes rather than submit to it, other foreign firms have learned that Indianization can be a convenient bulwark against complete nationalization or stricter government regulation in areas such as profit repatriation or taxation. For instance, recent protests by Indian shareholders prevented the proposed public sector takeover of Kaiser Aluminum.

The "superior technology" transfer argument does not stand up to scrutiny either. In some industries, like pharmaceuticals, the contribution of local branches is little better than that of a soft-drink bottler-they merely repack in small quantities bulk drugs imported from the parent firm.

Much of the advanced technology that comes into India tends to stay within the four walls of the multinational affiliate, where Indians work only as laborers and junior technicians. Parent companies take substantial precautions to keep their equipment from benefitting anyone but themselves. Take, for example, the clause in the confidential contract binding the Dutch company Philips and its Indian subsidiary: "The subsidiary company undertakes ... not to copy the machinery, tools and instruments or any part thereof supplied by Philips or any subsidiary of Philips or to cause or permit the same to be copied and not to prepare drawings of such machinery, tools and instruments parts thereof nor to cause or permit the same to be prepared."

Technology, furthermore, is not `transferred'-a nice aseptic word-but bought and sold. For every item the parent company `transfers,' the local subsidiary makes payments out of the country's foreign exchange reserves. In the case of Imperial Chemical Industries' Indian affiliate, the technical collaboration agreement on polyester fiber involved the subsidiary's commitment of two million pounds in sterling for engineering and design charges incurred by ICI. (This payment did not include a 3.5 percent royalty on the value of all polyester fiber produced in India ad vitam eternam.)

The most negative impact of multinationals on India's economy is undoubtedly their drain on the country's foreign exchange resources. The companies were invited to enter India in the first place only because they were supposed to promote exports and thus bring in hard currency as an aid to further industrialization. To this end, successive governments (beginning with Jawaharlal Nehru's) have provided a variety of incentives, ranging from tax exemptions for export industries to cash assistance, cheap credit and funds for sales promotion abroad. The government also encouraged the accumulation of foreign exchange through legal curbs on non-essential imports and by restrictions on excessive profit remittances by subsidiaries to their parent firms abroad.

Foreign firms seem to have turned these measures to their advantage. In spite of the export obligations placed upon these subsidiaries in order to obtain an industrial license, their exports represented only five percent of their combined total turnover. Exports, interestingly enough, were not high technology products, but were almost entirely made up of traditional agricultural products like tea, coffee, tobacco or hides and skins. o

Furthermore, many multinationals supply only negligible amounts of foreign exchange. Of the 189 foreign-controlled companies examined in Goyal's study, just two (Brooke Bond and Unilever) earned a third of all the foreign exchange generated by foreign firms in 1975-76, while 29 earned none at all..

Although industrial exports by multinationals were extremely limited, this was perhaps a blessing in disguise, since those that did occur often took place at a net loss. A government commission estimated that because of transfer pricing, every dollar earned abroad by Philips for manufactured items represented a net loss of 30 to 50 percent compared to the cost of production. As Goyal says, "The practice of exporting goods to [parent companies] at a loss is obviously an indirect method of transferring resources from India, and the motivation for accelerating such exports is to defeat the spirit of foreign exchange regulations, not to promote Indian national interests."

What of the foreign-controlled companies' imports-i.e., what do they cost India in terms of hard currency? About 20 percent of their total remittances abroad were devoted to machinery, spare parts, interest, dividends, royalties and know-how fees to their parent companies (machinery and spares may well have been overpriced, in another use of transfer pricing). But by far the largest component of imports was raw materials-over 50 percent of the total, even excluding oil imports. This indicates that multinationals were not taking full advantage, to say the least, of locally available raw materials.

Goyal's very conservative bottom line is that the activities of the 189 companies under review cost India a minimum of U.S.$25 million in the single year 1975-76.

Alternatives exist to such squandering of scarce resources by foreign firms in India. An element of one such alternative is the National Small Industries Corporation (NSIC). This undertaking is directed with enthusiasm and much frustration by T.S. Kannan.

Kannan's enthusiasm comes from recognition of what could be accomplished by small industries in India-his frustration from the government's apparent will to remove with the left hand what it has granted with the right. The government declared, for example, in 1970 that certain industries would be reserved for small scale production. One of these was to be toothpaste. It did nothing, however, to prevent the expansion and high pressure sales tactics of the multinational producers like Colgate-Palmolive or Ciba. Both have more than doubled their production since 1970 and have continued to advertise heavily; Colgate has even been allowed to introduce new brands. So much for small scale toothpaste production, now moribund.

Kannan has no quarrel with the iron laws of economics. He merely points out that small industry could be just as cost-efficient as large companies-probably more so-if most of the cards were not stacked against it. If small industry is dying, it is partly because government regulations maintain its costs at a much higher level than those of multinationals.

This discrimination is illustrated by the case of soap manufacture, which in India is based on imported mutton tallow. A legal fiction allows large corporations to import in bulk "on the high seas," tax free. Purchases by small manufacturers importing lesser quantities at dockside are fully taxed. As a result of this and other disadvantages, the small soap industry sustains raw material costs that are about 20 percent higher than those of foreign competitors.

Village units formerly handled the crushing of coconuts, groundnuts or sesame seed into oil and cake, just as they traditionally produced "jaggery," a coarse brown sugar, from sugar cane. Now a combination of technical modernization and ordinary greed is wiping out local processing-oil crops are sold to solvent extraction or hydrogenation plants; sugar cane goes to large refineries. Why? Simply because the chronically indebted Indian farmer must mortgage his crops before harvest to the local money lender or merchant, and the latter can turn a higher profit by selling to a large plant than to a village unit.

As processing moves away from the village and becomes more costly, food intake for ordinary people declines. They must now buy back their own produce in the form of refined oil or sugar at high prices. When village mills processed local crops, residues unfit for human consumption were fed to cattle. Today, industrially packaged cattle feed must be purchased-or more likely done without, due to its cost-so cattle grow scrawnier and people drink less milk.

This worsening nutritional situation calls for action. One recent and particularly inappropriate Indian response has been to establish snack-food nutritional programs for school children, based on the extrusion of Textured Vegetable Protein (TVP) from soybeans.

A U.S. firm, Wenger International of Kansas City, is prepared to supply India with the extrusion machines; it is not clear whether the soya is to be locally grown or imported from the U.S. as the program expands. The Indian nutrition bureaucracy supports this high-tech `solution' and, one regrets to report, UNICEF is sponsoring pilot projects in TVP snack-feeding programs in selected villages.

It seems to have occurred to no one that village feeding programs based on procurement of local raw materials could provide incentive to farmers, an opportunity for local people to participate and food just as nourishing and surely less costly than industrially processed TVP. At the very least, Indian industry could be asked to provide the machines required, avoiding recourse to dependency-creating imports.

The national small industries corporation is fighting dependency, against heavy odds. One current project promotes the local manufacturing of bicycle pumps - not for bicycles, but as a means of raising small quantities of water for growing seedlings. This technique would save irrigation water for more effective use in the growing season. But here again, NSIC finds itself in competition with the Indian private sector and with foreigners - in this case U.S. companies like Solar Electric International which want to sell the country solar pumps. Kannan fears that a decision to go solar in this area would be costly and labor-displacing.

There are plenty of opportunities for job creation through small industries - but in spite of India's Ghandian tradition, the Big is Beautiful philosophy appears to be winning out. NSIC calculations indicate that the investment of 15 million rupees in a large spinning plant would allow production of 1800 kilos of cotton yarn per day - with a 25-fold increase in employment and at higher wages than now prevail in the cotton spinning industry. Decentralized cloth manufacturing could also put a stop to the economic aberration that causes cotton producing areas like the Punjab, Gujerat or Tamil Nadu to ship their raw fibers to manufacturing centers from which they must then buy back the finished cloth.

Though common sense may be on the side of decentralization, Kannan assumes large textile plants will continue to be built, since this is what the existing textile industry wants, and what Prime Minister Gandhi now seems to favor.

The structure of decision-making in India virtually guarantees inefficiency and catering to special interests. Choices affecting the country's industrial future are made in closed committees from which people known to be against a given project are excluded. The in-group allows no public debate, and proceedings of its meetings are confidential. Details of one or two major contracts discussed in closed committee sessions have been leaked to the press or to opposition parliament members, provoking scandals that put the projects at least temporarily in cold storage. But most contracts, supported by powerful local or foreign lobbies, go through without a hitch.

India's industrial dependency is not the result of equity control by foreign-based multinationals; indeed most subsidiaries have by now had their capital "Indianized. "Their control is no less effective, however, for being more subtle. Usually multinationals enter the country through the good offices of an existing Indian firm, as suppliers of certain critical components. Once inside, the multinational may announce that it has a reputation to protect and insist on supplying all its own materials and processes. A few years down the road, it may demand a whole new line of machinery. And so long as India looks to multinationals rather than to its own National Small Industries Corporation, this is likely to remain the case.

* S.K. Goyal, "The Impact of Foreign Subsidiaries on India's Balance of Payments," Public Policy and Planning Division, Indian Institute of Public Administration, New Delhi, 1979.

Susan George is a fellow of the Amsterdam-based Transnational Institute. She is the author of How The Other Half Dies (Allanheld Osmun and Co., Publishers).