ECONOMIC HIGHLIGHTS

New Delhi, 29 November 2005

Economy on Upswing

Sustaining High Growth Rate

By Dr. Vinod Mehta

India’s economy is enjoying a high rate of growth for the past few years, despite not-so-good performance of the agricultural sector. The current rate of growth is around 7% with the manufacturing sector booming. The agricultural sector is also expected to perform well. The Finance Minister feels that this growth rate can be pushed to 8% provided we increase investment as well as push FDI. The Deputy Chairman of the Planning Commission feels that this growth rate can be pushed to 10% but the coalition politics is coming in the way.

The economy is on the upswing. It is not only the computer software sector but the traditional manufacturing sector like steel, cement etc., which is leading the upswing.  The economists believe that the upswing in the manufacturing sector will continue.  The National Council of Applied Economic Research has already projected the GDP to grow by about 7% during the next three years.  The manufacturing sector is expected to grow by more than 6.21%, infrastructure by 6.54% while mining and construction by 5.89%.  The farm sector which saw a decline of 3.1% in 2003 is expected to grow, which in business terms implies increased demand for manufactured products in the coming years.

Apart from this, the economic reforms of the past one and a half decade have made the Indian industry by and large competitive in the international market.  With foreign exchange regulations being relaxed in a phased manner, the Indian industry is acquiring manufacturing units abroad.  Some have started acquiring new technologies to stay competitive.  For instance, the Indian motor parts manufacturers were initially opposed to the inclusion of motor parts in the FTA (free trade area) between India and Thailand, but now when it has been signed, they are now scouting for new processes and technologies in the South East Asian and other countries.

At the moment, India and China are enjoying relatively high growth rates China around 9% and India 7%.  This has particularly attracted the attention of foreign investors who wish to set up manufacturing bases in India or invest in the service sector.  This is high time that we have a foreign direct investment (FDI) policy which covers all the sectors of the economy, except for those sectors where the state feels that there should be no foreign investment, as in the case of atomic power.

Foreign direct investment in the manufacturing, infrastructure and other sectors of the economy is much better than commercial borrowing or investment in scripts by foreign institutional investors.  The investment by foreign institutional investors (FII) could be considered as hot money which can be withdrawn by them at any time depending upon their judgment of the economic scene.  The FDI in manufacturing, infrastructure etc. leads to the creation of assets which will remain within the territorial boundaries of the country if, the foreign investor wishes to withdraw from the company for some reasons.

At the moment there is no single policy on FDI and there is some kind of ad hocism in it.  It varies from sector to sector.  In insurance business, the FDI cap is 26%; in the banking sector   been set at 74%; in certain cases 100% foreign equity is allowed while there is automatic approval in some cases where foreign equity participation is up to 51%.  There are certain areas like real estate where no FDI is allowed at the moment. 

Moreover, foreign companies are not as yet allowed to take over sick companies.  There are a number of them in the textile sector, bicycle manufacturing sector or there are individual public sector undertakings like pharmaceuticals and photo films which could be allowed to be taken over by foreign companies with salutary effect.  This will not only bring in new technology and new management system but also turn them into profitable units.

In the past the Foreign Investment Promotion Board (FIPB) has been a big failure in attracting  foreign investment.  As early as in 1997, while speaking at the plenary session of the Economic Summit, organized by the CII and World Economic Forum, the then Industry Minister  observed: ”Foreign funds can find their own direction.  It is my personal opinion that the FIPB must go.  There should be no Central interference in matters related to inflow of investment.” Last year  an Investment Commission was set up to advise the Government on FDI, while the role of FIPB was changed. But the observations of the former Industry Ministry on the FDI are still relevant.

Sometime back  the Department of Industrial Policy and Promotion (DIPP) is already reported to have made a proposal  to allow a maximum of 76% stake in the form of FDI across all the sectors, including the real estate.  This is as good as 100% FDI as it will allow full management control to the foreign firm. But at the same time it will also be obliged to disclose its financial results; at the moment 100% owned foreign companies are not expected to make any disclosures.

The other feature of DIPP proposal is that the balance of 24% equity would have to be sold to the Indian public.  It means that the Indian investor will be allowed to share the prosperity of the foreign firm.  But it is much more than that—24% equity to Indian public means that the liquid stock (shares that are regularly bought and sold in the share market) will grow which is not only good for the stock exchanges but also for the widening of the share market.  It may also have positive impact on mutual funds and the proposed pension funds.

If we can have such a policy as proposed by the DIPP with suitable modifications, one can expect a large inflow of FDI into India.  The timing is very important;  and that time is here! The economy has finally come out of the Hindu Growth Rate (about 3%) and FDI can provide the necessary push.

It may be mentioned that not only the developing countries but also the developed countries are looking for opportunities to increase inflow of FDI.  A study prepared by the FICCI three years ago stated that countries like Germany and France still allow investment allowance or accelerated depreciation to foreign direct investors.  China grants 10-year tax incentive to promote firms engaged in infrastructure, energy sector and knowledge industry.  South Korea provides special incentives for capital investments. Countries like the Netherlands, Denmark, Belgium, Spain, Switzerland, Luxembourg provide tax incentives; they follow the concept of group taxation.

If India encourages FDI it will not be doing something unusual or against its own interest.  The FDI in the current context would mean creation of assets, creation of more jobs and competitive economy; it is also likely to contribute significantly to the exchequer in the form of direct and indirect taxes. Therefore, the Left parties as well as opposition parties should have a realistic approach to FDI and should welcome it in almost all the sectors, including real estate and retail except for certain sensitive areas like atomic energy.

(Copyright, India News and Feature Alliance)

ECO     ECONOMIC HIGHLIGHTS

New      Delhi, 24 November 2005

 Creating More Jobs

NEED FOR LONG-TERM STRATEGY

By Dr. Vinod Mehta

The UPA Government had promised to create more jobs under the Common Minimum Programme (CMP). It has been in power for almost one and a half year and we have yet to see the results.  Generally speaking, increase in the level of investment will generate more jobs in the country, but it will not guarantee generation of more jobs on its own. People are already talking of jobless growth.

 The time, however, is ripe to devise strategies, both at the local and national levels, which lead to the creation of more jobs without resulting in mass migration of population from village/towns to large cities. Manufacturing sector is growing and the rate of growth is around 7 per cent. Many economists are of the view that we can sustain this growth rate in the coming years.

 It is common knowledge that about 74 per cent of the population lives in rural areas and 26 per cent in urban areas. In urban areas the problem of unemployment is not acute; it is serious mainly in rural areas.  The sheer size of the urban population in metropolitan cities like Delhi, Mumbai, Kolkata or Chennai  provide many job opportunities, more so in the unorganized sector. There is so much demand for various kinds of labour and services that anyone looking for a job can find some work even if it may not be to one’s liking; the labour that migrates to these areas is bound to find some work.

 It is a different matter that unregulated migrations leads to many problems in urban areas, like emergence of slums, increase in crime rate and so on but which needs to be checked.  But the real challenge of generating employment is in smaller towns and villages where the size of the population is so small that there are hardly any opportunities for generating remunerative employment. Setting up of factories or small businesses does not make any economic sense; where there are no factories or workshops the demand for labour is almost nil. Again the total population of the area is so small that it does not make economic sense to provide services or generate some kind of a work in these areas.

 According to the latest Census figures, out of a total number of 5,88,781 villages, 2,90,093, i.e. about 50per cent, have population less than 1,000. The number of villages having population between 1,000 and 2,000 is 1,14,395; the number of villages with population between 2,000 and 5,000 is 62,915; for villages with population between 5,000 and 10,000, the number is 10,597 and the number of villages with over 10,000 population is 2,779. It means that for 70 per cent of the villages the size of the population is less than 2,000.

 What impact can it  have on employment generation?  For one you cannot make massive investments as it would not be able to reap any economies of scale. It will not be able to supply the required skilled or semi-skilled labour. The demand for services from the villagers will not be enough to provide job opportunities. This means that the demand factor will also not work. Thus there will be almost nil opportunities for young people of these villages to find jobs even in the unorganized sector. This problem is acute in the North-East.

 In other countries, the rural population is small while urban population is very large. Less than 25 per cent  of the population is in rural areas. A large number of jobs are being created in the service sector, followed by the manufacturing sector. (Even though some of the services are being outsourced by these countries, it has also been noticed that some of the affected employees are also migrating to the developing countries.) Therefore, the employment opportunities are relatively more in these countries than in a country like India where the population is overwhelmingly rural. It is a sheer challenge how to generate employment in areas where the population is less than 2000.

 Therefore, the Government will have to have some kind of a strategy to generate employment in these villages in the coming years. One of the ways to overcome this situation would be to club these villages into viable economic zones on the basis of some economic criteria before making investment in these areas. Most of the activities may be centred around food processing of various agricultural products, including milk and milk products and smaller workshops, production units etc.

 For instance, the Government can help these villages to start food processing and marketing cooperatives, start small repair and maintenance workshops to attend to repair of mechanical equipments, to set up cold storages etc., which in turn will raise employment opportunities for the local people both in the organized as well as the unorganized sector.

 The second equally important point is to link all these villages with towns and metropolitan cities with all-weather good quality roads. This will help the rural people from these villages to take their products to nearby towns and metropolitan cities where there is a market for their  products. Good roads can facilitate the to- and-fro movement  of labour on daily basis to nearby towns where they are bound to find some work.  Once these villages are linked by good roads many of the companies in the private sector may find it economical to procure their raw materials or outsource their work from these places. They may even come forward to set up small units.

 Large-scale investment does not mean that one put in big money and set up bigger projects. Large-scale investment also means that one spreads out investment all over and helps people to engage in meaningful economic activity. Food-for-work programme is not just enough. What is needed is gainful employment on a sustained basis. This means easy movement of agricultural and other products from one place to another and easy to-and-fro movement of labour from village to nearby towns.

 In the long run, however, the emphasis will have to shift from creation of jobs in the agricultural sector to creation of jobs in manufacturing and service sector. The experience of developed countries shows that more jobs are created in the non-agricultural sector. Therefore, the creation of jobs in the rural sector can at best be a medium term solution to unemployment problem.

 The urban renewal mission and the Bharat Nirman mission for rural India, apart from creating assets, need to focus on creation of jobs on a large scale. Mix of appropriate strategies, both at the micro level and the macro level, can do wonders.---INFA

 (Copyright, India News and Feature Alliance)

ECONOMIC HIGHLIGHTS

New Delhi, 16 November 2005

Towards Common Market

Cooperation within SAARC Countries

By Dr. Vinod Mehta

The 13^th South Asian Association for Regional Cooperation (SAARC) Summit ended on a positive note in Dhaka. The leaders agreed not only to curb terrorism but also to increase economic cooperation among themselves and fight poverty in the region. Hopefully the SAFTA (South Asia Free Trade Area) would now take off, which is in the interest of all the member-countries.

Narasimha Rao’s Congress Government initiated the move, called Look-East policy but it was mainly confined to South-East Asian countries, especially the ASEAN. Now that India has established good relations with ASEAN it is high time that we also look at our neighborhood and try to work for a common market in the coming years.

The relations between India and Pakistan appear to be improving and hopefully would not come in the way of trade and economic relations between India and other SAARC countries. The potential of trade and economic links with Nepal, Bhutan, Bangladesh, Sri Lanka and Maldives are very high. It has been stated in this column on two occasions just before the Agra Summit that both India and Pakistan stand to gain immensely from trade and so also other countries. Together these countries constitute a vast market to tap and there is a demand for each others’ products.

Let us not become hyper-sensitive on being labeled as ‘big brother’ by some quarters in these countries. Both territory-wise as well as population-wise India is relatively much bigger than all the SAARC countries taken together. In economic terms also, India is very large; it is one huge market perhaps of the size of EEC. Its GDP is much higher than those of its neighbours and at the moment it is enjoying a very large and comfortable volume of foreign exchange reserves that it had not seen in the last 50 years. The Indian economy is by and large growing at an average rate of 6 to 7% per annum, which may not be good but is also not bad. Therefore, at this stage India can afford to be more liberal towards its neighbors than what it had been.

Apart from economic gains India is looking for, it should also aim at earning the goodwill of the people of these nations by being more accommodative to them. At this stage of our economic development, we can also afford to allow duty free imports of certain selected items from some of them. In fact, I had argued on similar lines more than a decade ago in this column. At the moment, Bangladesh is having adverse trade balance with India. Whether this measure will help reduce the adverse trade balance of Bangladesh vis-à-vis India has yet to be seen, but it will have good impact on the relations between two countries.

One would like to say that India should show similar gesture to other neighbouring countries, especially Nepal, Bhutan, Sri Lanka and Maldives, and allow their products to have an access to Indian markets in a big way. Let’s not get paranoid by the fact that the goods from these countries would flood the Indian market. Their production bases are so small that it will call for huge investment before they can produce goods on a scale which can flood the Indian market. In fact, after liberalization many Indian companies have shifted  their production bases to some of these countries.

At the moment, India’s external trade is mainly oriented towards OECD countries and some West Asian countries. ASEAN  countries would come second. The trade turnover between India and the individual SAARC countries is so small that it does not attract attention even in our annual Economic Surveys.

 A few years ago it was said that the cheap Chinese goods would swamp the Indian market when India would open up its economy. The Chinese goods entered the Indian market in a big way but had to beat a retreat as the quality of Chinese goods was low that the Indian consumer did not accept it even though they were relatively cheaper. Compared to China, our South Asian neighbours are small in every respect and unlike China would not be able to dump their goods on the Indian market.

There are also several additional opportunities to expand cooperation with the SAARC nations. For instance, the tourist sector within the SAARC region has been neglected for a very long time. Tourism sector has low capital investment but relatively high earning potential. At one point of time there was an idea to start daily air services to link the capitals of all the SAARC countries. That the idea has been revived is welcome. We can learn from the ASEAN experience. All the ASEAN capitals are linked by air and they have special low fares for travel within ASEAN countries. In fact India is prepared to have open sky policy with SAARC countries provided they also reciprocate.

Apart from this wherever possible rail, road and sea links must be strengthened among the SAARC countries. With Nepal and Bangladesh we can develop world class road and rail links for speedy movement of goods and people, extending beyond their borders to China, Myanmar and Thailand. With Sri Lanka, Maldives and with Bangladesh we can develop sea links

India has also taken a lead in admitting more members.  The Dhaka Summit has admitted Afghanistan as a new member. We should work to admit China and Central Asian countries as dialogue partners. It is India which can again take the initiative in this direction by lobbying with SAARC countries. Even if it calls for amending the original SAARC Charter, India should be able to carry the other members along with it on this issue.

Afghanistan at the moment is engaged in reconstructing its economy. It not only needs humanitarian aid but also trade to put its economy on a strong footing in the long run. Now it would be more easier for countries like Nepal, Bhutan, Bangladesh and India to send goods to Afghanistan  by road through Pakistan.  It would then be difficult for Pakistan to block transit facilities to Afghanistan.

As for the land, locked Central Asian nations like Uzbekistan, Tajikististan, Kyrghistan and Kazakhstan, they are also looking for trade opportunities through land routes with India. If they become dialogue partners or associate members of the SAARC, then Pakistan will find it profitable to allow the movement of Central Asian goods to India, Nepal and Bangladesh through its territory and vice-versa.

ECONOMIC HIGHLIGHTS

New Delhi, November 10, 2005

India’s White Revolution

Dairy Industry Should be Global Player

By Dr. Vinod Mehta

Thanks to the Operation Flood Programme, India has today emerged the largest producer of milk in the world and will retain this position in the coming years.  In 1950-51 the country was producing only 17 million tonnes of milk, while in 2003-2004 its production reached the level of 92 million tonnes; the projection is 114 million tonnes in 2010 and 138 million tonnes in 2015.

However, behind this dry statistics lies the fact that this increased milk production has also brought about a social change in the rural sector by way of dairy cooperatives which put reasonable earnings in the hands of the poorest of the families owning one or two cattle only.   There are more than 77,500 Dairy Cooperative Societies organized in more than 170 milk sheds involving over 10 million farmer members.  A major feature of our white revolution is that the Government has ensured that a large percentage of the total milk produced in the country is made available to the general public as fresh liquid milk.

With the opening of the agricultural sector under the WTO agreement, fears were being expressed that all these achievements may be in danger if the Government did not take appropriate measures to protect the consumer as well as the farmer from the “unjust competition” and “unjust practices” of the milk exporting countries.  The multi-national corporations already operating in India in the fast moving consumer goods sector or the multinational companies that may be thinking of entering the country may change rules of the game and the gains made in the rural sector in the form of social change may be lost. 

If one goes by the experience of the past two years, the fears appear to be unfounded. The Indian Dairy Industry need not worry about multinational companies, but should concentrate on capturing a slice of the international market, especially for milk-based products like cheese, dahi, ice cream etc.

Though India is the largest producer of milk today in the world, yet it is not the largest exporter of milk.  According to the data available for the year 2001, India produced 80.5 million tonnes of milk (the projection for 2002 is 82 million tonnes), followed by USA 75 million tonnes, Russia 33 million tonnes, Germany 28 million tonnes, France 25 million tonnes, New Zealand 15 million tonnes, Australia 11 million tonnes, China 10 million tonnes and Japan 8.3 million tonnes.

Since milk is a perishable item it is converted first into milk powder to increase its shelf life.  The powder is again reconverted into liquid milk and some chemicals added to prolong its shelf life.  Apart from conversion of fresh liquid milk into powder, liquid milk is also converted into various dairy products like butter, cheese, butter oil, ghee, ice cream, flavoured milk and so on.  All these are value added products that fetch high prices to the manufacturer and not for the producers.   This is the normal practice in the developed countries.

With the opening of the agricultural sector multi-national corporations may   enter the dairy sector in a big way in the coming years and two of them, which are already in India, are trying to get a foothold in the Indian dairy market. The cooperative milk sector, led by Gujarat Cooperative Milk Marketing Federation (GCMMF) has taken the competition seriously and pushing ahead in a very big way.  However, to ensure level playing field, the multi-national corporations should also be asked to ensure the supply of fresh liquid milk to the Indian consumers before they can market the reconstituted milk or milk products.  The proportion of fresh liquid milk to be marketed by the multinational corporations must be clearly defined.  Again while marketing fresh milk, they must be asked clearly to state on the carton or pouch whether the milk is fresh milk or reconstituted milk. 

In a situation where MNCs are likely to enter the milk sector, it is essential to protect the interests of the consumers.  It is common knowledge that most of the multinational corporations, especially in the fast-moving consumer goods sector resort to various kind of undesirable practices to sell their products.  Many a time they resort to play of words to mislead the public. 

This is most of the time true with many products.  For instance, the reconstituted milk in tetra packs is either described as pure milk or natural milk, which clearly means that it is not fresh liquid milk.  Since people cannot distinguish between fresh liquid milk and reconstituted milk they buy the reconstituted milk as if it is fresh milk.  Again the milk powder they use to reconstitute milk comes from various sources. 

Therefore, the time is ripe to put in place strict quality control norms for the sale of milk and milk products, both for the domestic and the international market. It is thus important that, as a first step, the Government makes it mandatory that every packet of milk and milk product should carry the exact information whether a particular product is made from fresh milk or reconstituted milk etc. 

After having met the liquid milk needs of the consumers, the domestic milk producers are now going in for value added products like butter, cheese, curd, ice cream in a big way. It was feared that such a move will lead to increase in the prices of milk and milk products, but surprisingly the prices of milk and milk products in India have remained relatively stable in the past three years.  This is to the credit of our dairy The cooperative and private dairy sectors should slowly look  at the foreign markets where the prices are quite remunerative for products like butter, cheese, ice-cream etc.  The GCMMF has already taken a lead by exporting large quantities of liquid milk to Singapore every day. It is now eyeing the milk markets of Thailand, Malaysia and Indonesia. The day may not be far when India may export milk to China also. They should also enter the international market for dairy products.

It should also be understood that in most of the countries the farmers get large amounts of subsidies to maintain the production of milk at a certain level.  This factor should be taken into account while allowing foreign companies to sell milk and milk products in India by levying appropriate customs duties.

Now the project patent regime has come into force from  January 1, 2005 and all dairy processes and products will become patentable and we should move fast to patent our processes and products so that we are not edged out our own market.  For instance, it is India which has perfected the processes of producing milk powder and cheese from buffalo milk, which needs to be patented immediately if not done so far.

In the new WTO regime, India must keep its edge over milk production and should aim at to emerging as largest exporters of milk and milk products. For this we need not rear more cattle but increase the milk yield through better feed to cattle and by improving the pedigree of cattle stock.  Moreover, we must enforce stringent quality norms that conform to international standards for the marketing of milk and milk products, both in India and abroad.  We must also move fast to obtain patents for our processes and products. This is very important if we have to develop and sustain international markets for our milk and milk products. – INFA

(Copyright, India News and Feature Alliance)