By Dr. Vinod Mehta

ECONOMIC HIGHLIGHTS

New Delhi, 14 October 2005

Growth Prospects of Economy

NEED FOR INVESTMENT OPPORTUNITIES

By Dhurjati Mukherjee

The growth rate of the Indian economy had for long been a matter of concern.  But lately there has been a paradigm change in the situation.  It has grown by more than 7% in the past two years and has averaged more than 6% over the past decade.  This obviously speaks of a dramatic change since the early 1990s.  In the current year also, the National Council for Applied Economic Research (NCEAR), the Reserve Bank of India and some other organizations have projected a growth of around 7%, which has boosted the confidence of planners and economists.  The Planning Commission is now thinking of setting a target of 8% during the 11^th Plan period.

While industrial buoyancy has helped in maintaining the growth rate, it is the service sector which has contributed the most and is expected to grow by over 8.5% this year. As is well known, the service sector comprise trade, transport, hotels, communications, business and financial services etc.  Recent years have witnessed increasing growth in most southern States.  For instance, Karnataka, Tamil Nadu and Andhra Pradesh have seen increasing levels of capital investment.  These States account for 21% of overall amount of project investments in the country as of June 2005.

Also, a majority of economic activity in the service sector driven Mumbai gives a lot of economic prominence to the west.  Almost every enterprise has some kind of operation in the Metropolis, which is rightly considered as the financial capital of India.  Even a number of other western cities like Pune, Surat and Ahmedabad have been the centre of a number of service sector enterprises.

It is thus quite obvious that the southern and western zones account for around 50% of the GDP though they have only 32.5% of the population.  The remaining 67.7% contribute the remaining 50% of the country’s GDP.  The eastern, north-eastern and central regions have a lot of dependence on the agricultural sector.  This explains their poor contribution to the GDP as the agricultural sector has been a slow and unreliable performer.  The only really good performing agricultural zone is the northern region and specially the states of Punjab and Haryana.

Infrastructural bottlenecks coupled with problems like inflexible labour laws, incidence of indirect taxes and multiplicity of procedures in starting operations have been holding up India’s attractiveness as a manufacturing base or export platform.  However, for the country to maintain or accelerate the growth rate, the following challenges have to be seriously considered: greater private sector investment; part disinvestment of PSUs for functional efficiency and more accountability; structural reforms in banking and finance after putting in place appropriate laws and appointing regulators, if necessary; changes in labour laws; more foreign direct investment in the oil, gas and other sectors; all-round technological upgradation to meet international standards; and suitable measures to make India an attractive business destination. 

The World Development Report 2005 has again ranked India as the fourth largest economy in terms of purchasing power parity even as it said that the country lagged behind in technology and efficiency.  It said that though in certain areas investment and productivity in industries have improved, the country was held back in technology due to lack of proper exit policy.  It has pointed out that he general trend showed many firms improved their total factor productivity significantly but aggregate number, has been slow to respond.

The Confederation of India Industry (CII) had sometime back floated a 10-point action plan to help the country a double digit growth rate.  The agenda talked of reforms in areas such as infrastructure, agricultural, entrepreneurship/self-employment, value-added tax, manufacturing, governance, fiscal management and exports.  Though physical infrastructure development has received attention in recent years, there is a need to make them world-class. 

Global trade in farm products stands at around $640 billion and there is expectation that the country in the next 3 or 4 year would leapfrog from being a marginal player with a stake of below 1% to at least 2% share of market.  Though prospects appear quite encouraging with more and more regional trade tie-ups, it remains to be seen whether the country would become the “food chain of the world”.  According to North Block officials, “we plan to cut the maize of laws that restrict farm trade and streamline agricultural credit delivery systems”.  However the food subsidy should not be reduced.

Another problem area is the growing unemployment and underemployment which has been a matter of concern, jobless growth in the advanced country has translated into jobless growth in the developing countries.  Further, recent times have also seen the sharp accentuation of economic inequalities.  It is felt that revitalization of the rural areas and revival and growth of the unorganized and informal sector holds the answer to the problem.  Some economists have been of the opinion that industry has the capacity to absorb the cheap labour of the rural areas. 

Moreover, unless the rural economy is strengthened by the joint efforts of agriculture, agro-based industries and export-oriented cottage industries (which have potential and demand), it may not be possible to achieve all-round development though high growth rates may be achieved.  As envisaged in the Tenth Plan, industrial clusters to promote village (and tiny) industries would have to spread at a fast pace covering around 40% of the districts in the next five years.

Any future strategy would have to take into consideration the growth potential of industry, the services sector and also the rural sector.  The services sector has possibly the greatest potential with fast rate of growth and contribution around 51% of the GDP.  Similarly the industrial performance has shown remarkable results in the last few years but in the coming years manufacturing techniques would have to be improved further to match international standards.

Apart from ensuring that growth rate is geared up, it would also be necessary to evolve an integrated strategy of development which would take care of poverty eradication and improve the lives of people all over the country.  The Human Development Report 2005 poses a pertinent question: why has accelerated income growth not moved India into a faster poverty reduction power?  Obviously tackling the problem will require emphasis on the rural sector and also on social infrastructure development.  However, the following may be considered in this connection: ensuring good governance at all levels; effective decentralization; making local self government strong and powerful; stronger public-public partnerships; rethinking or subsidies; tackling corruption; and transparency in Government functioning.

In the coming years, India has possibly to grow at a higher rate to look respectable.  Some believe that we ought to emulate the South-East Asian miracle.  During the thirty-year period (1960-1990), economies such as Singapore, Hong Kong and South Korea grew at phenomenally high rates, often touching as impressive as 10%.  If they grew at such high rates for almost three decades so can we.  Thus a rise in real GDP is important. 

Liberalization, privatization, open economies, research and development are possibly marvelous solutions to the growth dilemma but none of these will make a dent on our welfare unless the rate of growth of population is simultaneously kept under control.  China has succeeded on both fronts.  Of the population growth is kept below say 1.5% (compared to the present level of 2%), as China managed to lower the population growth rate at 1.3% during the last two decades, there would be a quantum jump in India’s per capita GDP in the coming years.---INFA 

 (Copyright, India News and Feature Alliance)

ECONOMIC HIGHLIGHTS

New Delhi, 6 October 2005

The Nation’s Backbone

MANUFACTURING SECTOR ON GROWTH PATH

By Dr. Vinod Mehta

The first quarter of the current fiscal year shows that the manufacturing sector has registered a growth rate of more than 11 % and that this trend is likely to continue during the current fiscal.  In fact, the manufacturing sector has revived in the last two years and is steadily growing.  This is all good for the economy in the coming years, provided they are able to maintain and sustain its growth. As for the current fiscal year the overall growth rate will be above 6 %, because of the good performance of the manufacturing sector.

As the figures indicate the sectoral share in the GDP of the agricultural sector has gone down from 55.8% to 27.3% between 1951 and 2000, while that of the industrial sector for the same period has gone up from 15.2% to 25.6% and that of the service sector from 29% to 48.2%. However, it may be stated that during the reform period, the share of the industry in the GDP was on an average 24%. The investment in the manufacturing sector between April 2000 and April 2002 declined from 22.4% to 17.8%. Since then it might have gone up as the trend of the growth rate of the manufacturing sector shows.

It is common knowledge that apart from the agricultural sector, manufacturing sector is the backbone of any country. The fact the economies of USA, Japan and European countries are so strong because they have a very strong manufacturing base. Most of these countries are able to manufacture more than what they can consume in their own countries and then export it to other nations. It is a different thing that their manufacturing sector may not be growing at a very high rate as of now but it is a fact that they are strong nations because they have a strong manufacturing base.

After the introduction of economic reforms, the IT sector, especially the software industry, grew at a very rapid rate while the manufacturing sector suffered a bit as it had now to face competition from manufacturers from abroad. It was also a period of adjustment for the manufacturing sector to pull itself up and to reduce the production costs so that they could compete with the foreign manufacturers. This has now started paying dividends, as reflected in the relatively high growth of the manufacturing sector.

However, this is not enough. This sector has to emerge as an international player in the next 10 to 20 years and be counted along with Japan, South Korea, China and Europe. To achieve this, we shall have to go in a planned manner as the Koreans have done. It is this sector along with the agricultural sector, which can make us a developed nation.

The National Manufacturing Competitiveness Council (NMCC) has released its recent report on national strategy for manufacturing wherein it has identified factors which are coming in the way of increasing competitiveness of the Indian industry. One factor which has been identified is erratic electricity supply wherein the manufacturers lose about 8.4 % a year in their sales; second factor which has been identified is the existing rigid labour laws; third is scarcity of skilled labour; fourth is poor infrastructure; and fifth is the high tax regime especially the indirect taxes.

The interest rates in the past one decade have almost halved but it is not reflected in the competitiveness of the manufacturing units because of the above mentioned factors. We have not been able to carry out the electricity reforms. The unit cost of production of electricity in India is very high, compared to unit cost of production in other Asian countries. Unless we increase the output of electricity to meet our total requirements and at the same time reduce the unit cost production our manufacturing will not become competitive. An electricity shortage may thwart India’s rush to modernity, according to The Economist.

The labour reforms need to be carried out at the earliest as it has been stated a number of times in this column that these reforms can be carried out only by taking the labour force into confidence. But so far no Government at the centre has taken an initiative to start dialogue with the labour force in India. The report of the Second National Labour Commission has been put in the racks.

It may be noticed that only 3 % of the labour force is organized, while the rest is in the unorganized sector; and only this small percentage of the labour force in the organized sector is holding the labour reforms as they are organized into strong unions and are unwilling to discuss anything about labour reforms. This is an issue which the Government will have to face and must start a dialogue with the labour unions at the earliest.

As for the infrastructure, again we are moving ahead in certain segments like national highways but going backward in other segments like airports. Here again, to be competitive in the manufacturing sector we need world class infrastructure in the country, so that goods can move from one place to another much faster and without any hitch.

Finally, the indirect taxes, especially in the form of excise duties and custom duties are very high. It has been stated that China which manufactures product at 70% of the cost of Indian product, the Indian manufacturer has to pay on an average 15 per cent tax which makes the Indian goods less competitive than the Chinese goods. The time has come to revamp our indirect tax structure, so that we can manufacture our goods which can compete in the world. 

The next year’s budget is still five months away and it is hoped that the Finance Minister will come out with a slew of measures to improve the productivity of the manufacturing sector so that 11 % growth rate of this sector is sustained and improved upon.---INFA.

(Copyright, India News and Features Alliance)

ECONOMIC HIGHLIGHTS                  

New Delhi, 29 September 2005

Lessons For Prosperity

CHINA MOVES FASTER THAN INDIA

By Dr. Vinod Mehta

A visit to Beijing and Shanghai gives a feeling as if one is in Singapore or Kuala Lumpur. One sees high rise buildings on both sides of the wide roads, glittering offices, posh hotels and good service culture. I was again in China after a gap of 16 years. And these years the skyline of both Beijing and Shanghai has totally changed.  So also the work culture. Construction activity is getting on a feverish pace. One gets the feeling why India is not moving at that pace?

It is common knowledge that both India and China started their journey along the path of economic development almost at the same time and from almost the same economic level, one under the democratic system of governance and the other under one party rule.  However, China took to economic reforms almost two decades earlier than India.  The reforms there are still being pursued vigorously. In China the Communist Party has become the catalyst for economic reforms, while in India there are political groups that are still opposing economic reforms.

Since the introduction of economic reforms more than twenty years ago, China has traversed a long way in its development.  Before the introduction of reforms, China had wiped out illiteracy and assured minimum level of social security, including health care to its citizens. India till date has not been able to eradicate illiteracy and assure a minimum level of social security to all its citizens. China has seen vibrant economic growth, over 9.4 per cent.  We are still struggling to reach 6 per cent growth rate.           

The industrial sector of China has been enjoying a very high growth rate since the introduction of economic reforms and the opening up of the Chinese economy.  According to the data made available by the State Statistical Bureau of China, the industrial sector has been registering an annual average growth rate of 12 per cent. Beijing attributes this remarkable growth to two factors.  First, the reform in the industrial sector was initiated by enlarging the decision-making powers of the enterprises and relaxing of controls on the functioning of industrial enterprises.  This was followed by privatization of the enterprises.

Secondly, the introduction of huge amounts of foreign capital and the opening up of the economy quickened the pace of China's industrialization. The FDI in the construction sector as well as in infrastructure is quite visible. One can see construction activity at a feverish pace in both Beijing and Shanghai.  To quote the Chinese sources, "The establishment of a large number of joint ventures and exclusively foreign funded enterprises has brought in capital, advanced equipment and modern management expertise, greatly enhancing the technological and management, level of China's industrial enterprises, enabling the production of China's manufactured goods to quickly catch up with or approach the world advanced level and increasing exports by several fold." 

During my stay in Beijing, a batch of state-owned companies “rolled out the red carpet for foreign investors by launching a share-stake promotion conference.” As many as 156 small and medium public enterprises with total assets of US $ 3.6 billion were opened to all investors, according to China Daily.

Beijing also claims that the gap between China and advanced countries in terms of the overall industrial technological and equipment level has narrowed by 10 to 15 years.  As against this, the reforms in the industrial sector in India have considerably slowed down over the years.  If we take the average annual growth rate of industrial sector it is hovering around less than per cent.  Still there are many constraints on the flow of foreign capital and technology in India. 

The public sector reforms and disinvestment in some of the public sector units are floundering.  The technology level of Indian industries is still very low.  Though, no studies have been made to find out the technological gap between India and other advanced countries.  One hunch should be that the technological level of Indian industry could be 30 to 40 years behind the advanced countries.

The agricultural sector of China has also witnessed a very robust growth in the past two decades.  It must be noted that unlike India where reforms in this sector are yet to be discussed, the rural reforms went hand in hand and with industrial reforms in China.  In the past 20 years, the average annual growth of agricultural production in China has hovered around 6.7 per cent.  Before the reforms the China was net importer of grain to meet its food requirements.  After the reforms the country has been continuously reaping good grain harvests with the output in 1996 topping 500 million tons.  It may be noticed that the landmass of China is bigger than that of India, but the arable land available to China is just half of India’s.

It is true that India is able to meet its food requirements from its own sources.  But the agricultural sector has not been growing at the rate at which it should. It has come down to one per cent from three per cent in the eighties.  That is why the agricultural experts fear that if India does not move now to raise its agricultural output it may face severe food shortages in 20 years from now.  The average annual rate of growth of agricultural sector has been hovering between three and four per cent for the past 20 years.

Far from reforms in the agricultural sector, we do not have any agricultural policy at the moment.  We are still dithering over foreign investment in the industrial sector.  The Chinese are going in for foreign investment in the agricultural sector in a big way.  This sector in China which was opened to foreign investment has attracted large foreign investments.

According to the Chinese sources nearly 60 per cent of foreign direct investment in the country’s agricultural sector has gone into the developed coastal region.  But now the Government is encouraging foreign investors to invest in the agricultural sector in western and central China. The Chinese feel that they would be able to increase the output of grain by 50 million tons in the next few years and achieve that it needs to invest between 20 and 50 billion dollars in the agricultural sector.  Precisely for this reason it will encourage foreign investment.  In India, it would be some achievement for the agricultural sector if we are able to remove all restrictions on the movement of agricultural products within the country. 

There is very little information available on the agricultural technology being used in China.  But going by the fact, its arable land is half of India’s and is yet able to produce five times the grain output, shows that Chinese productivity per hectare is much higher.  This should be a challenge for us and should afford us an opportunity to increase agricultural output by devising appropriate strategies. 

This is not to say that everything is alright with the Chinese economy; it has its problems and that corruption in China is also rampant. There are areas and regions where poverty is acute and unemployment relatively high.  The non-performing assets (NPAs) of the state- owned banks are reported to be much larger than the NPAs of state-owned Indian banks and economists are expecting that it may burst at any point of time. 

Whether the Chinese banks go bust or not, the above observations should make our nation think seriously as to how we can match their growth and emerge as an important economic power in the region.  There is an urgent need to push economic reforms in all the three sectors of the economy viz., agriculture, industry and service.---INFA

 (Copyright, India News and Features Alliance)

ECONOMIC HIGHLIGHTS

New Delhi, 15 September 2007

Sensex Sets New Record

REVIVE PRIMARY CAPITAL MARKET

By Dr Vinod Mehta

The Bombay Stock Exchange index, commonly known as the Sensex has crossed the 8000 mark. Experts believe that the economy will be able to sustain it in the coming months.

This means that the investors have confidence in the economy, they expect it to grow and that policies will become more market-friendly in the coming months. But, the rise in the Sensex is mainly in the secondary capital market where the existing shares are bought and sold. No new industries are being set up. In other words, the existing companies are becoming more profitable but the production base is not expanding. It is the primary capital market, which needs to grow along with the secondary capital market.

The growth of primary capital market is one of the indicators that the economy is vibrant and growing.  However, the primary capital market in the country has been virtually dead for the past many years. Perhaps, in the early years of liberalization, many inexperienced and fly-by-night operators entered it and then disappeared with the public money. This has been a dead loss to the investors who invested their savings in these companies. 

There were other new companies, which entered the primary capital market in a big way, but their shares are now ruling very low--between Rs one to five. They did not dupe the public but were unable to perform. Their bad performance could be either because of the management or the sales problem.  

The few new issues that did come up in the primary capital market were mainly from the banking sector, especially the nationalised banks. Even today these banks are coming out with new issues. However, no new issue for setting up of manufacturing concern by a new company has come up in the past years.

A growing country like India cannot allow this state of affairs to continue for long. Policy makers and the regulators of the primary capital market must put their heads together to revive this market. May be its revival is linked with the pace of our economic reforms. It is seen, that in spite of the reforms being a decade-and-a-half-old, a lot of controls on economic activities continue. On top of it, the procedures for setting up of new industries are very cumbersome. There has been no change in the archaic labour, company laws and so on and that these could be holding back new investments.

The country has been talking of an exit policy and social security net for the past eight years, but nothing concrete has emerged so far. An exit policy without a social security net is going to be very painful. The Indian trade unions are unlikely to accept any such policy without a corresponding security net. The country, therefore, will need to simultaneously think of the two aspects so that all the players in setting up of the new industries know where they stand and what is expected of them.

Setting up of new industries is always a big risk. The time a project is conceived and is realised, many developments take place on the political and economic front, both at the national and international level, which could make all initial calculations go wrong. This happens many a times, but what makes things worse is that once the calculations go wrong there is no way that one can get out. In other countries, the promoters could sell off to a healthy company and get out of it, whereas, here it becomes a sick unit --the promoters can neither get out of it nor are they able to run it any longer. The shareholders too are stuck with the shares which cannot be sold in the market. 

In fact, India has the largest number of sick industries in the world, where a large amount of public funds are locked. The money lent by the banks to these units becomes non-performing assets of the banks and financial institutions, while the money invested by shareholders becomes dead savings for all purposes. 

India must get out of this state of affairs at the earliest.  The take-over code has not been helpful in tackling the question of sick industries. Thus the exit policy has become very vital. The company laws have been amended. But, as far as both labour and trade union laws are concerned, we have yet to initiate a debate on these crucial issues. It is in our interest, to at least start moving in this direction in a transparent manner. Vested interests in trade unions in the organized sector are bound to oppose this tooth-and-nail, but a beginning has to be made at some point. Outdated labour and trade union laws cannot be allowed to hold the country to ransom. However, the reform process should not be a one-way affair and that the labour sector should too be taken into confidence.

At another level, the regulatory authority like SEBI should become more active and intervene at appropriate levels and at appropriate times, so that the primary sector market grows at a healthy pace. Established companies will not always enter the primary capital market in a big way for their new units, because they can always tap their internal accruals or come out with rights issue. The new entrants in this market are generally people who are entering business for the first time. Therefore, it is very difficult to say whether the promoters are genuine players or not. This risk will always be there.

However, what the SEBI can do is to create a vast data base of new promoters, entrepreneurs and their companies which enter the primary capital market and monitor their functioning. If any company and its promoters have not done well or have disappeared from the market scene, they should neither be allowed to enter the primary capital market again, nor be allowed to set up any new company again. Thanks to computer networking, it is now easier to keep track of unscrupulous elements in this market. 

Apart from this, the Government must develop positive programmes to encourage young entrepreneurs to enter the primary capital market. Setting up of a new industry in a competitive environment is always a Herculean task for them. They have to be mentally and financially prepared for it. The Japanese have been handling this problem by setting up what they call science parks. 

Even today, when the Japanese industry is highly developed and diversified, the science parks play a critical role in nurturing young business. They have all the infrastructure under one roof to help a budding entrepreneur to start business -- science laboratories to develop new products, practical tips on setting up new ventures, help search sources of finance, marketing their product and help enter the capital market. To top it all, the young entrepreneur is also provided office facilities in the initial stage.

The parks also support a hotel, a number of restaurants, banks, post office, tourist office, a shopping centre, conference rooms and so on. They also provide opportunities to bring the new entrepreneurs and prospective buyers of its products together. In short, the parks prepare the budding entrepreneurs to face competition at both the national and international markets. It is for this reason that the success rate of new entrants in the primary capital market is much higher in Japan. 

The States also need to adapt this approach to prepare the young so as to ensure a high success rate in the primary capital market. The Centre, as well as regulatory authority like SEBI, along with our management schools and scientific laboratories can help set up such institutions in every State.

With the secondary capital market booming, it is high time the Government does something seriously to revive this primary capital market, so that new manufacturing industries can come up in the country on a large scale. It is the manufacturing industry which provides economic strength to the nation.—INFA

(Copyright, India News & Feature Alliance)