Shankar Sharma says too much FDI in some sectors is a mistake

ETMarkets exclusive: The year was 1991. Manmohan Singh as the then finance minister, under his far-sighted prime minister PV Narasimha Rao, opened up the economy to private sector as well as foreign players, ushering in economic liberalisation in India.

25 years on, Prime Minister Narendra Modi, took that initiative to another level, unleashing a slew of unprecedented FDI reforms, which was delivered at a scale not seen since 1991. Under his regime, India received a record $51 billion in foreign direct investment (FDI).

But ace investor Shankar Sharma believes long before Narendra Modi, Manmohan Singh and PV Narasimha Rao, it was Jawaharlal Nehru who did a much better job than his successors.

Speaking to ETMarkets.com through email, Sharma said former prime minister Jawaharlal Nehru’s policy to emphasize on domestic ownership of foreign entities was a masterstroke.

“India got this right back in the days of Nehru, when we insisted on domestic ownership of the likes of Colgate and Unilever. Look at what a movement it has been. Else, we would have got all 100 per cent subsidiaries, like in many parts of the emerging world,” he said.

“In my view, we have wagged our tail too much, and failed miserably in putting a price on our massive domestic market, the way China has done,” Sharma said.

The Nehruvian policies on economic reforms after the Independence of the country were based on the principle of ensuring India’s economic sovereignty, and enabling all-round domestic-focused development of industry.

After Independence, the FDI policy was designed keeping national interests in mind and with an aim to use FDI as a medium for acquiring advanced technology and mobilising foreign exchange.

The industrial policy of 1965 allowed MNCs to venture into India through technical collaboration. The government adopted a liberal attitude by allowing more frequent equity infusion.

However, faced with a massive balance of payments crisis in late 1990, the then government agreed to liberalise the economy to foreign players and capital in order to receive the aid given by IMF and the World Bank.

The reforms initiated in 1991 allowed foreign capital into many industries, which were then extended by the current government to almost all industries, including defence, which was hitherto banned.

“My firm belief is that India has opened up to FDI far too soon in many sectors to the detriment of domestic players,” Sharma said, adding that, “Somehow, in India, if anybody says so, they (people who talk of protectionism) are labelled as being part of the Bombay Club.”

Sharma believes one of the biggest mistakes of the past 25 years has been excessive opening up of the economy.

When asked what he would have done differently, Sharma said, “I would wall off certain sectors to FDI, while allowing freedom to portfolio money to invest in those sectors. In my view, that’s been a huge mistake by our policy makers over the past two decades.”