Developments in the last two weeks have strengthened the trends that were visible in last month’s Budget. Basically, the Budget attempted to make two points: First, that fiscal prudence would be balanced with growth incentives; second, that private-public partnerships would have a much greater role to play in the economic development of the country. This second assumption required several actions to be put in place, and we can see that starting to happen.
Prime Minister Manmohan Singh has cautioned that the growth story cannot be taken for granted and that it would depend critically on the development of infrastructure—a caution that is necessary, given the ebullience of several manufacturing companies in growing. There is also the sentiment that 11th Plan investments in infrastructure will be far short of the $500 billion targeted—adding to the worries arising from the Prime Minister’s statement. Capital and capacity are emerging as major constraints to growth, a factor anticipated in this column some weeks ago.
Two announcements in this regard are of interest. One, tax breaks would be allowed for infrastructure bonds raised by the private sector—currently these breaks are available only for specified government-approved securities. Two, there is a move to free foreign direct investment (FDI) from constraints—there was an unexpected announcement that 100% FDI would be allowed in defence, to allow multinational firms entry here.
Obviously, there is some serious thinking going on about capital formation. The argument is that gross capital formation—the net acquisition of fixed assets—around 35-37% is inadequate, given the poor infrastructure, to sustain a 9-10% growth over a long period of time, and that all efforts must be made to attract capital, local or otherwise. In infrastructure, there is an announcement that sectoral caps for bank lending are likely to be raised from the present 20% to 40%—indication that the debt available for these projects is constrained.
Finally, all these steps have to be taken within the framework of a gradually tightening monetary policy, high inflationary pressures, and a continuing revenue deficit that will suck out considerable liquidity during the year. The central bank has also, for some reason, stopped intervening in the foreign exchange market; the resultant appreciation of the rupee is a cause of worry for exporters. No wonder policymakers have turned cautious in the last few weeks.
The good news is that demand is still surging, employment in services is back, hotels are full, real estate is up and all the manufacturing companies have long order lists. Small and medium enterprises, or SMEs, are increasingly looking at capacity expansion out of their retained earnings, and not seeking huge amounts of finance. In the balance, between the numbers put forth by Shankar Acharya in the Business Standard on 25 March and by Martin Wolf in the Financial Times on 3 March, we can make a safe bet for 7-8% growth for the next few years.
The concern in this story is the government’s behaviour towards development. Given that the private sector is ready to take the investments and risks associated with infrastructure, and given that this is what the government wants most, the lethargy in making things easier for these projects to materialize is indeed surprising. There is very little evidence of attempts to speed up things, to grant clearances, to monitor, supervise and review—if public sector units such as Bharat Heavy Electricals Ltd, or Bhel, fall behind in deliveries by months and years, there is a real cost to the economy that needs to be corrected by the government. In short, this is an opportunity for the government to move from expressing anxiety to real action, and there are many areas where this can be done.
One example is in the urban infrastructure sector. The interest in closed city developments—Amby Valley and Lavasa in Maharashtra, and the cities within special economic zones—stems from the fact that these developments offer a total living concept with assured water, power, waste management and leisure activities. There is a great demand: People are willing to pay to clean up urban living. This is an opportunity to direct funds into urban infrastructure— water and waste management are likely to be the most important concerns of urban living in the next decade.
Also, local governments need professional advice in terms of waste management experts, architects and technology evaluators to make such programmes work. If the government were merely to identify panels of such experts, allow the local bodies to choose these experts, subsidize their inputs through a cost-sharing scheme, then we would have implementable programmes for every city. Actually, we could choose just a few to begin with: Instead of looking at Mumbai, Delhi etc., we could start with Pune, Coimbatore, Mangalore and the like.
This is the model that the private developers are adopting. Implementation should be left to local bodies and citizens, with rigorous quality monitoring, set up and paid for by the Union government. In a few years, we could see improvements in several cities.
S. Narayan, a senior research fellow at the Institute of South Asian Studies, Singapore, is a former finance secretary. We welcome your comments at email@example.com