As a result of a primary focus on income redistribution and social welfare, current policy priorities have been criticized for ignoring private capital and investment. Flagship social welfare programmes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme, National Rural Health Mission, Indira Awaas Yojana and the food security Bill are based on the belief that benefits of India’s growth have not trickled down to the poor. The fact that India’s social indicators lag other developing countries is supported by data from the World Development Report of the World Bank and the Human Development Report of the United Nations. Infant mortality in India is 50 per thousand compared with 17 in China; literacy rate is 74% compared with China’s 96% and mean years of schooling stand at 4.4 years compared with 7.5 years in China.
While Amartya Sen is correct in turning our focus to human development indicators when comparing growth in India with China, the key question is if our emphasis on social welfare is causing us to ignore growth, private capital and investment. The last two years have shown mixed trends for global companies and private and public investors in this regard. Given the current economic slowdown, deteriorating investment outlay and increasing scepticism among global investors, the 2012 budget should be used as a critical and timely opportunity to send a strong and unambiguous signal to the world that we want and support business growth and investment capital.
There are five bold measures that can put India firmly back on the investment map.
First, the Investment Commission of India should be reconstituted to support investors making major investments in India. An initial threshold could be set at $5 billion in either greenfield projects or acquisitions, for mandatory referral to the commission. The commission should consult the government and be required to publish its recommendations on key policy issues and timelines for approvals within a defined time period. The head of the commission could have a cabinet rank and a place on the cabinet committee on economic affairs. This will provide international investors confidence that there is someone influential supporting their investment efforts in India from within the system.
Second, an initiative should be taken to identify and support “flagship” infrastructure projects and these should be provided an accelerated execution timeline. This will include projects such as the $100 billion Delhi-Mumbai infrastructure corridor that are proceeding very slowly and viewed as test cases by foreign investors. If needed government capital should be invested to kick-start such projects. The National Manufacturing Policy’s recommendation to set up national investment and manufacturing zones should also be implemented in the form of a few pilot projects. Finally, mega projects in the power and road sectors should also be included to catalyse investment and reform in these capital starved industries.
Third, reform of India’s outdated 55 Union and 100 state labour laws that are a serious deterrent to growth in organized labour should be put on the agenda. Laws including the Industrial Disputes Act, 1947, the Trade Unions Act, 1926, the Workmen’s Compensation Act, 1923, the Factories Act, 1948 and the Beedi and Cigar Workers Act, 1966 need a comprehensive overhaul to reflect the needs of a modern economy. Creating a committee to provide a comprehensive set of recommendations and a deadline to introduce this in Parliament will send a positive signal.
Fourth, the disinvestment programme must be modified to be a privatization programme that is accompanied by reform in public sector companies. Eight of India’s top 20 companies by market capitalization are still owned by the state, illustrating the scale and scope of India’s public sector. There is a need to exit certain “non-strategic” businesses by selling controlling stakes, create independent boards with greater autonomy, increase management flexibility and finally invite domestic and foreign strategic investors for technology where necessary. A clear directional shift will provide efficiency gains, enhance trading valuations and support efforts to monetize government ownership.
Finally, a road map for financial liberalization should be provided. While this has limited impact on the real economy, it is an important signal that foreign investors have been eagerly anticipating for a long time.
It would not be pragmatic to expect all these initiatives to be taken up in any one budget, but a selection of any subset of these recommendations would send a strong signal to global investors as these will be indicative of both significant political will and ideological conviction. At a time when India needs to regain credibility with global investors, bold and imaginative initiatives are needed to demonstrate that we are committed to making India a wealthy and modern economy.
The renewed investor confidence will stimulate investment and growth, which is crucial for the long-term prospects of the Indian economy.
Suneet Weling is executive director, Kotak Investment Banking.
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