Since the late 1990s India has broken the record on many indicators of economic performance. To count just a few: GDP growth of 8.1 per cent in 2003-4-the highest since 1989-90. Consumer price inflation of 3.4 per cent in 1999-2000-the lowest in many decades. Foreign exchange reserves of $113 billion-among the highest ever. But amid all these stellar showing, there has been one big no-show-falling or stagnant investments. That is especially true of the manufacturing sector, which has shed jobs furiously in the past 4-5 years. After many false starts, an industrial investment revival seems to be in the offing. Most industries are rolling out big investment plans. Is this revival for real? What would be the speed and spread of an investment upswing? More importantly, will it reignite the job engine in industry?

India Today invited its think tank on the economy-Board of India Today Economists (BITE)-to debate and find answer to some of these questions. There were two new experts in the six-member board: Shankar Acharya, member, 12th finance commission and professor at ICRIER, and Ajit Ranade, chief economist with the Aditya Vikram Birla Group. They were joined by four old members of BITE-Indira Rajaraman, RBI professor at National Institute of Public Finance and Policy; Bibek Debroy, director, Rajiv Gandhi Institute of Contemporary Studies; Subir Gokarn, chief economist, CRISIL; and Siddharth Roy, chief economist, Tata Group. Union Minister for Communications and Information Technology Dayanidhi Maran was the chief guest and Rajya Sabha member Jairam Ramesh moderated the discussions.

PICTURE SPEAK

ON INVESTMENT TRAIL: (From left) Maran, Roy, Gokarn, Rajaraman, Jairam, india today Editor-in-Chief Aroon Purie, Editor Prabhu Chawla, Debroy, Acharya and Ranade

How significant is the investment
REVIVAL?

Gokarn: For the first five months of 2004-5, the growth in machinery and equipment-the sector with a heavy weight in index of industrial production-was about 27 per cent. That is the highest growth that any sector has shown in this period. Its growth was zero or negative till September 2003. So new investments by way of new machine and equipment being installed are going on. But we don't know yet whether new machine and equipment are being bought for replacement, for capacity expansion or for new projects. I think the replacement demand is predominant. There is very little sign of new business activity in manufacturing though there are lots of signs of new business activity in services.

Jairam: Shankar, there are two issues here. The paradox of impressionistic evidence being that the corporate sector is in an investment mania, but it is not reflected in the macro- economic numbers. Secondly, do you agree that at last we now have a robust indicator which shows that an investment revival is on the cards?

Acharya: For about eight years we have been waiting for an investment boom. Maybe, this is the time. But I would be cautious about interpreting any single indicator as definitive. I would want to see what is happening to the indicators like non-oil import growth. The last time we had an investment boom was in the mid-1990s when gross domestic investment was 26 per cent of the GDP. Today it is 3-4 percentage point lower than that. Today we get excited with the manufacturing growth rate of 7-7.5 per cent. For three years in the mid-1990s we saw manufacturing growing at 12-13 per cent. One of the reasons why we have had a slowdown in investment activity, particularly in manufacturing, is that the post-liberalisation flush of funds created excess capacity.

IDEAS FOR ACTION

"LET PANCHAYATS TAX AGRICULTURE" Right now, the states have the power to tax agriculture. Transfer that power to Panchayats. INDIRA RAJARAMAN

Ranade: For a substantial and sustainable growth in GDP, led by an investment boom, we need to see at least 10 projects of Rs 5,000 crore each. I don't think we are seeing that. We seem to be looking only at the private corporate sector. We are excluding infrastructure, which would be public-private investment or just government investment. In the private corporate sector we need to distinguish Greenfield (new) and Brownfield (expansion) investments. The big impetus to growth comes from Greenfield projects, but what we are seeing are a lot of brownfield investments. Some big investment projects have been announced recently, but these intentions have to be converted into actual projects on the ground. Let us also not forget there are other drivers of growth. Last year it was agriculture. Exports have become a major driver of growth. This is a new phenomenon and exports are growing despite at least two handicaps in the past couple of years-rupee appreciation and global uncertainty.

Rajaraman: I agree with the numbers that Ranade wants to see in order to conclude that there is growth-promoting investment going on. I would even raise it to Rs 60,000 crore which would be two percentage points of GDP. I do not think we are anywhere near that, though investment is certainly looking up. The growth rate of production of machine and equipment is high, as Subir pointed out, but there is one discordant note to that: slowdown in the growth of construction.

Roy: The investment outlook is positive. The capacities created in the mid-1990s are now being utilised. The industrial groups are investing again. The export market has started opening up. To quote a newspaper report, Tata Steel alone is going to make about Rs 25,000 crore investment by 2010. The Tata Group's total investments will be much larger and would include investments in automobile and telecom.

Debroy: The data on production of machinery and equipment, non-oil imports and increased credit offtake are healthy, but as of now they related only to the first quarter of 2004-5. But to generalise that the boom we have been waiting for has arrived based on just these fragmentary numbers would be premature. The next two quarters are going to be crucial. Only at the end of the third quarter can we make a definitive statement on whether the revival in investment is for real or not.

What could turn the bloom
INTO A BOOM?

Policy stability, cooling down of global oil prices, low interest rates and some heavy doses of infrastructure spending could herald an investment and employment boom.

Jairam: The consensus is that it is too premature to call this an investment boom. There is a turnaround in investment in the private corporate sector. Let's now discuss what is required to make this sustainable. There is an old argument that unless there is a commensurate increase in public investment private investment recovery simply peters out.

Acharya: Public investment has to play its role, particularly in rural infrastructure. Maran today made a very powerful presentation on infrastructure, but many of the projects are intentions. One of the worrying things on our economic outlook, which does feed into the investment outlook, is that the trend growth rate of agriculture seems to have dropped from 3 per cent in the early 1990s to mid-1990s to 2 per cent between 1997 and 2004 .

IDEAS FOR ACTION

"CONVERT RURAL SUBSIDY INTO INVESTMENT" Agriculture is subsidised heavily but starved of investment. Convert some subsidies into investment. SHANKAR ACHARYA

There are two things that make me a little cautious on public investment. One, the kind of investment that has to occur has to come from state government budgets that are badly stressed. So their capacity to undertake investment is constrained. Two, agriculture is subsidised heavily through power, fertiliser and irrigation. It would be nice if a lot of those subsidies, instead of being subsidies, could be transformed into investment. Somehow our polity does not allow this to happen. The other big area for public private partnership in investment is urban infrastructure. Bangalore is one interesting example where there has been lots of investments in the IT industry. But the new investments are now going slow or flowing elsewhere because infrastructure there is getting stretched.

Jairam: Let me ask Maran. Politicians promise free power.... They seem to be only interested in subsidies which do not reach the people they are intended for. So, why not take all these subsidies and put them into an investment fund that builds roads, creates irrigation facilities and markets?

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Maran: Let us consider the Andhra Pradesh example. Former chief minister Chandrababu Naidu tried to reduce subsidies. We all saw what happened. That will make politicians very wary of cutting subsidies. It is like being once bitten and 25 times shy. I think unless the state and the Central governments can provide the basic necessity, you cannot stop subsidies.

Rajaraman: The kind of infrastructure investment that we want to see in the rural sector has to come from the states. How can that happen when the state finances are so stressed? There is a way out. Every year, states pay interest to the Centre on loans that they took in the past which carry interest rate as high as 14.5 per cent. I think it is time for the Centre to take a bold step to write off the interest payments or receive those interest payments and escrow them into a rural infrastructure fund that is then used to spend on things that the states are not able to do on their own. I agree with Maran that subsidy removal is a politically difficult thing to do. But I think that can be side-stepped for the moment if the Centre is willing to take the interest rate waiver or escrow route. The second possibility for generating more revenues to the fiscal system is to hand over the right to tax agriculture to panchayats. If you give this right to panchayats, they will be able to raise resources and can build village feeder roads and so on.

Jairam: Indira should be commended for giving two specific ideas. What she is arguing for is not just the right to tax for panchayats but more importantly for panchayats to retain the revenue that they earn and, therefore, the benefits of that taxation become visible locally. Subir, can you briefly respond to Shankar's comment on the trend growth of agriculture in the 1990s?

Gokarn: After the drought of 1987 we had nine years of stable growth in agriculture. Rural disposable incomes grew significantly and that is when the idea of rural markets and their potential came up. Having said that, let me point out that India's rural economy is only about half agriculture. The other half of the economy comes from industry and services. Of course, some of this industry and services are related to agricultural activity. It shows that the opportunities for off-farm employment have increased significantly.

Debroy: The arguments made so far seem to suggest that the issue is one of money. I do not think so. As far as I know, the Ministry of Rural Development is sitting on Rs 8,000 crore; it does not know what to do with it. If you look at the annual expenditure in the name of rural development, it is above Rs 50,000 crore. So, it is an issue of boosting the efficiency of public expenditure, better delivery and linking that expenditure with tangible things.

Jairam: What are the two things you would like to suggest to boost efficiency?

Debroy: First, take it straight down to panchayats. I think politically it is acceptable, though it may not be acceptable to the state governments. Second, re-energise the gram sabhas because until you do that and make the panchayats accountable to the gram sabhas, the panchayats also have an enormous amount of corruption.

Jairam: So far we have had four concrete ideas on how to enhance investment in rural infrastructure: convert subsidy into investment, have an infrastructure development-linked debt rescheduling plan, give panchayats the power to raise and use tax on agriculture and transfer all existing rural development allocations and expenditure to panchayat bodies.

IDEAS FOR ACTION

"USE INTEREST INCOME FOR RURAL INFRASTRUCTURE" Create a dedicated fund from states' interest payments on past loans and use it for building rural infrastructure. INDIRA RAJARAMAN

Ranade: Just two more minor points about rural infrastructure. One is use the EGs, the employment guarantee scheme, which is going to take off. Make it a pre-condition that the EGs and creation of assets are tied together. We should make sure that the EGs money is spent only on projects where there is concrete asset creation. Secondly, make the panchayats too implement the EGs. On urban infrastructure, we can actually have an effective public-private partnership. Private sector is willing to be partners. But unlike commercial risk what they cannot handle effectively is policy risk. So one way that "public" part of the public-private partnership can help is through some credit enhancements. We talk about policy risk because the time horizon of the project goes much beyond five or ten years and there is bound to be changes in the government during that period. Therefore, it is important that the project be buffered against policy changes.

Jairam: One of the political reasons why insurance industry was opened up after much opposition was to enhance the resources flowing into long-term infrastructure projects.

Ranade: We are very close to having guidelines fixed for investments by insurance firms into long-term projects or infrastructure projects. But I would still say that more than the funds, it is the policy stability that is important. It is what they call investment climate.

Jairam: Let me ask Dayanidhi, since there is uncertainty in coalition politics, do you see the type of policy stability required to get investments into infrastructure projects Ranade is talking about here?

Maran: I would like to bring up a different subject here.

We are all talking about Bangalore. The infrastructure in Bangalore is stretched. Where will the state government get the funds to invest in elevated highway or water? We do not tax the exports of software. We cannot do it because it is a very touchy subject-probably just like agriculture taxation. The money has to come from some place. Private investment is one option. Why should somebody invest in an elevated highway in Bangalore without any hope of returns?

Acharya: We do not have a vibrant, urban self-governing representative government which raises revenues for the betterment of the urban community. Nobody in this room probably knows who the mayor of Mumbai is. That is a reflection of our approach to urban governance.

Jairam: What you are saying is to allow municipal corporations to become financially more empowered so that they then become the major investors of infrastructure programmes.

Will job reservations hurt
INVESTMENT?

Yes. For most companies in the organised sector, labour market is already too rigid to allow frequent adjustment in workforce. Reservation will add to that rigidity.

Acharya: Yes. I think our rigid labour laws have hurt investment, particularly in manufacturing, by making labour a fixed factor rather than a variable factor. If you have reservation which is serious in its content, then this will make labour even more of a fixed factor. That does not mean that you will have no investment: you will have less.

IDEAS FOR ACTION

"TRANSFER ALL RURAL SPENDING TO PANCHAYATS" Transfer all rural development spending to panchayats, but also make panchayats accountable to gram sabhas. BIBEK DEBROY

Ranade: No. But I should qualify that. If there is so much rigidity, probably reservations will not add any further rigidity. Remember, only 10 per cent of the labour force is in the organised sector so we are addressing a small part of the labour pool. So, the short answer is no. But as always, the devil lies in the details. We do not know how reservation is going to work in the private sector.

Debroy: If we are talking about job reservation, as opposed to affirmative action, then as Ajit says we are talking about a very small segment-the organised industrial sector. But that is really the segment we are talking about investments as well. And job reservations would certainly have an adverse impact on sentiments.

Maran: My personal view is we need a consensus on this.

Rajaraman: I taught at IIM Bangalore for 18 years. We had reservations in the student intake. All of our reserved students got placements and the private-sector companies voluntarily recruited them. We have to think in terms of reservations at the feeder institutions rather than impose reservations on the private corporate sector itself.

Gokarn: The reason why the organised sector is only 8 per cent of the workforce is because of all of the rigidities imposed on its labour market. There is no incentive to the organised sector to boost the number of people it employs. Right now the manufacturing companies that are investing are those already in business. They are not really looking at hiring more people. So reservation is not going to affect their investment plans much. New businesses-that haven't picked up as yet-would be the engines of employment and I think they would be hurt by job reservation. But if reservation is to be extended to services, where employment growth is actually taking place we could see some serious damage to the growth prospects.

Roy: The issue is one of having more investment and more employment. Why unnecessarily put constraints which may affect investment growth?

Jairam: The overall consensus seems clear: there is no investment boom as yet, but there is a bloom. There are many dark clouds on the bloom flowering further. Certainly the price of oil is one.

The stability of policy and the ability of the government to carry through its reformist intentions is obviously another.

ON INVESTMENT IN INFRASTRUCTURE

The Indian economy is on a strong footing. We are now among the fastest growing economies of the world. The real GDP has grown by 8.1 per cent in 2003-4 and our effort is to have a sustained growth of 7-8 per cent in the coming years. However, we do recognise that these growth rates cannot be achieved unless the factors underlying such growth are strengthened. Infrastructure has been a major area of concern-we need to make our infrastructure world class. Major initiatives have been planned in power, roads, civil aviation, shipping, railways and irrigation with a view to creating robust infrastructure for achieving accelerated growth.

PICTURE SPEAK

"India has emerged as the second most attractive destination among global manufacturing investors."

In the next 5-7 years, 65,000 km of highways would be upgraded and developed at a cost of Rs 2,00,000 crore. An additional investment of Rs 550 crore is being planned to connect all the ports and the state capitals through another 10,000 km of highways. Railways is investing in expansion and upgradation. Airports are not behind-greenfield airports are being planned at an investment of Rs 2,700 crore in Hyderabad and Bangalore. Delhi, Mumbai, Chennai airports are being revamped. Air-India and Indian Airlines have a Rs 20,000 crore fleet acquisition plan. Between 2002 and 2007, an estimated Rs 95,743 crore will go into irrigation and flood-control programmes. Things are looking better in the power sector too. Between 2002 and 2012, we expect an investment of Rs 8,00,000 crore in the sector, the bulk of which is likely to come from private sector because of improved regulatory mechanism and restructuring of SEBs.

ON THE TELECOM VISION

India has been ranked the third most attractive FDI destination after China and the US. It has also emerged as the second most attractive destination among manufacturing investors. I can see opportunities for us to establish a strong manufacturing base too. The response from overseas investors is encouraging and I can assure you that we will firmly stand by their side to make India prosperous.

The telecom sector is on the threshold of a big breakthrough with 85 million telephone connections, an annual turnover of Rs 60,000 crore and jobs for 50 lakh Indians. The sector has transformed from a government monopoly to a competitive regime with multiple players. The private sector investment is pegged at Rs 1,53,000 crore. Teledensity has grown from under two in the 1998 to eight and we are adding two million telephones every month. All this fired up by a 70 per cent dip in handset prices and a 90 per cent drop in telecom tariffs in the past five years. A mutual reinforcement between various partners-the government, the regulator, the equipment providers, operators, the customers and a consistent policy direction has been at the base of this growth.

The future looks even brighter. We are targeting a 20-25 per cent growth by 2007 that would mean total telephone lines of 200-250 million. Such a sharp growth would need an investment of Rs 1,60,000 crore. So far, the total FDI in the sector is pegged at Rs 10,000 crore. Hundred per cent FDI is being allowed in telecom equipment manufacturing. FDI in telecom service providers may be raised to 74 from 49 per cent. I see lot of potential in telecom equipment manufacturing. Not too long back, indigenous equipment catered to a large chunk of our requirement. Today, they are mostly imported due to changing technology and a liberalised import regime. That needs to change. Indian telecom equipment and services market is expected to jump from $13.7 billion in 2001 to $24.3 billion by 2006, according to Frost and Sullivan. Both the Government and the industry will have to boost domestic manufacturing at competitive prices.

(Excerpts from Maran's inaugural speech at the BITE discussions)

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