Dear FM, are reforms only for foreigners or Indians, too?

It’s good to start the year with reforms. Foreigners, including individuals and pension funds trusts, will now be able to invest directly in Indian stocks , instead of indirectly through participatory notes.

Thank you, Dr Manmohan Singh. Thank you, Mr Pranab Mukherjee.

Here’s a suggestion, though. A finance ministry statement announcing these changes said “this has been done in order to widen the class of investors, attract more foreign funds, reduce market volatility and deepen the Indian capital market.”

Surely, Dr Singh, Mr Mukherjee, we’ve got this wrong. Do we need foreign investors to “widen” and “deepen” our markets, or do we need Indians?

Why is it that reforms always mean giving foreigners an opportunity here and not Indians? Why is it that reform is always the last resort (“because we need foreign funds right now”)? Are reforms not good enough in themselves?

[caption id=“attachment_169850” align=“alignleft” width=“380” caption=“Is only Wal-Mart capable of creating the cold chain infrastructure that will ensure that half our fruit and vegetable production does not rot on the way from farm to fridge? Amit Dave/Reuters”] [/caption]

We reformed our licence-permit economy in 1991-92 because we needed the International Monetary Fund’s support. We hastened reforms in 1999-2004 because the post-Pokharan sanctions were beginning to hurt.

We dematerialised stock ownership in the mid-1990s not because it would help our investors but because foreign institutional investors (FIIs) who came to invest here post-1991 refused to sign thousands of share transfer deeds whenever they bought or sold stocks.

We open up retail - and put it on hold - to tell foreigners that we have not given up on reforms. We don’t seem to want reforms for our own people.

We explain the need for foreign direct investment (FDI) in retail as a sop to farmers - that they will get better prices from Wal-Mart and Carrefour rather than Indians.

But is that true?

Is only Wal-Mart capable of creating the cold chain infrastructure that will ensure that half our fruit and vegetable production does not rot on the way from farm to fridge?

Is it only Carrefour that will ensure that farmers get a decent return for their efforts and consumers a reasonable price at the market?

When we are ready to spend Rs 1,00,000-2,00,000 crore to subsidise a Food Security Bill, how is it that we cannot spend Rs 50,000 crore to set up a terrific cold chain to help our own farmers? When it comes to re-election schemes, we will waste money in thousands of crores, but when it comes to work for our farmers and consumers we want Wal-Mart to do our job.

A few months ago, the government liberalised rules for foreign investment in government and corporate debt (limits raised to $15 billion and $ 20 billion) as well as in infrastructure bonds ($25 billion). More recently, the Reserve Bank of India (RBI) freed up interest rates for non-resident Indians (NRIs) - and rates have simply shot up dramatically.

All this is being done to boost dollar inflows. And the same goes for the latest reform measure - the decision to allow foreigners, especially pension funds, to invest directly in stocks.

Indians invest less than 5 percent of their household savings in stocks and corporate debt instruments, but we think reforms must help foreigners.

India’s provident funds have more than Rs 5,00,000 crore available for investment, and returns on this huge stockpile of capital are meagre. The corpus needs a dose of equity (perhaps 10-20 percent) to lift long-terms returns.

But, no, we will allow foreign workers (their pension funds) to invest in Indian stocks, but not Indian workers? Why do we have to put up with bad fund management and poor account-keeping by the Employees’ Provident Fund Organisation (EPFO), when better fund managers are available with the National Pension Scheme? We will allow foreigners to enter Indian markets when stock valuations are enticing - that’s right now - so that they can earn huge returns, but we will keep Indian workers far away from better returns.

This is asinine. The finance ministry’s claim that allowing foreign pension funds to invest in India directly will “widen” and “deepen” the market is laughable. On the contrary, the reform will make the Indian markets overdependent on foreign flows and the vagaries of foreign governments.

Look at what’s happening already.

International risk-aversion has caused FIIs to withdraw from the Indian market, damaging the rupee, crashing the stock markets, and boosting inflation.

This year, European banks will pull out a part of their Indian exposures to shore up their capital. A report in the Indian Express on Monday says this exposure is equal to 15 percent of India’s GDP. If even 5 percent exits, it will rock the Indian economy and send the rupee crashing to Rs 60 to the dollar.

And yet, to get over a foreign exchange crisis that has been largely imported from the west, our solution is to make it easier for western investors to invest in Indian stocks, bonds and debt. This is an open invitation not to deepen and widen our markets, but to give outside forces the right to destabilise us at will.

The right way to widen and deepen our market is to balance the huge dependence on FIIs with greater domestic investment in stocks and debt.

Two measures will help immensely.

As already stated, the EPFO and the National Pension Scheme must invest a greater proportion of their corpuses in equity.

Government must make it easier for ordinary citizens to invest directly in government debt - instead of making it easier for foreigners to do so.

True, ordinary Indians can invest in government debt through mutual funds - but this has not worked because debt funds depreciate and appreciate depending on interest rates. They have become risky for ordinary investors with regularity of risk-free incomes in mind. By making direct investment in government debt easy - anyone should be able to invest through an online bank account - will help investors avoid capital loss by holding securities till maturity.

So, Dr Singh, Mr Mukherjee, the right way to reform is to include Indians in it. You have talked about inclusive growth. Now, how about inclusive reforms? Indians included.