Economic Highlights

New Delhi, 15 February 2007

Stick To Economic Logic

Blind Opposition will Slowdown Growth

By Dr. Vinod Mehta

As of today the economy is booming and foreign investment firms have raised India’s investment ratings implying that Indian business can now raise funds abroad on easier terms.  It is perhaps the best time to take advantage of the situation and give a big push to the decisions which are holding us back from realizing our full growth potential. We have already missed the growth bus once compared to ASEAN countries and China and let us not miss it again.

If Indian companies can take over companies abroad why can’t they takeover domestic companies, especially the sick ones? Or, why can’t we allow foreign companies to take over sick Indian companies provided they bring in latest technology and infuse funds into it?  Similarly, why not allow loss-making public sector units to be taken over by strategic partners either domestic or international?  Isn’t it strange that Tatas can take over steel company abroad and Birlas aluminum company but we do not allow the ailing Indian Iron and Steel Company to be taken over? Similarly, there are other areas of concern, like the deployment and management of pension funds, creation of mega companies, introduction of GM (genetically modified) crops, FDI and so on.

Consensus on these issues can unleash more forces, which can have salutary effect on the economy  as a whole.  Economic laws have their own logic and the governments can either facilitate certain developments in the economic sphere or obstruct certain developments, but they cannot change the economic logic.  For investment to increase, a nation professing any ideology--capitalist, socialist, social democratic, totalitarian, mixed economy, or religion based---the domestic savings will have to be increased, and if they are not enough these will need to be supplemented by foreign savings in any form -- either through borrowing or direct foreign investment.

The partners in the UPA Government must have a clear understanding of the issues and not just blindly oppose any policy of the Government from their ideological standpoint.  What is the harm if the Government proposes that five per cent of the pension funds may be invested in equity market? Over a long-term period it will give a higher rate of return than if all the funds were invested in Government bonds. The General Pension Scheme for Government employees was discontinued in 2004 and replaced by Contributory Pension Scheme but because of the opposition from some of the UPA partners these funds have not yet been properly deployed.  The losers are the prospective pensioners and not the political leaders.

It is to be understood that every political decision on economic issues involves economic costs  which the individuals as well as the country as a whole have to pay. It could be less rate of return to pensioners or non-revival of sick units or less investment or more than necessary subsidies.  Therefore, it is high time that blind opposition to any policy measure gives way to rational thinking.  Therefore, for the good of the country's economy, it is important that there is some broad understanding on major policy issues relating to economy among the coalition partners as well as political parties.  Broadly speaking, there will have to be some broad understanding in the following areas.

First of all there has to be some broad understanding in the area of fiscal policy.  The trend in the past four years has been to progressively bring down the direct and indirect tax rates. This has been an important departure from the past wherein the excise and customs duty on individual items were drastically changed in either direction every year.  This has been a healthy development. The direct tax rates have more or less stabilized but excise duties need to be further streamlined and custom duties aligned with the ones obtaining in the ASEAN countries

There is also a need for a broad understanding on the quantum of subsidies which are doled out to various sectors.  The old adage that "cut your coat according to your cloth" holds true for the country as a whole.  At a time when there are distortions in the economy or there are demands on social justice, every country has to provide subsidies in one form or the other, but this is also true that subsidies cannot go beyond a certain point and if the economy attempts to go beyond that point it will lead to various other problems like inflation, distorted price structure, waste of precious resources and so on. 

It is then high time that the coalition partners as well as political parties agree that the quantum of subsidies will never exceed a certain proportion of the national income every year and that every case of subsidy will be thoroughly reviewed every three to five years so as to enable the policy makers to decide whether there is a case for its continuation or not and what are the other new areas which need subsidy.

Thirdly, there must be some broad understanding among the coalition partners as well as political parties on disinvestment policy towards public sector undertakings. There must be a broad agreement as to the method of disinvestments, mergers, de-mergers and whether the Government would hold majority shares or will have minority stakes and a kind of political understanding that losses of public sector units would not be made good from budgetary contributions; the public sector must be allowed to function like commercial organizations and must aim at earning normal profits for its investor, namely the Government. 

Merger of public sector units including banks, if it leads to reaping the economies of scale, should attract the attention of all the political parties.  If, for instance, the merger of Air India and Indian Airlines can help cut operating and maintenance costs of the two airlines there is no need to keep them separate units.  Hopefully, the two airlines would be merged in the next two months.  It will strengthen the competitive strength of the airlines to compete with the domestic private and international airlines.  A broad agreement on merger policy towards public sector units among the various political parties will be in the best interest of not only the public sector but also of the country as a whole.

The fourth most important area where there is a need for a broad consensus among the coalition partners and political parties relates to the area of foreign investments.  Foreign investments are needed for basically two reasons.  First, the domestic savings are not enough to meet the country's investment requirements and second, the technology available within the country is obsolete and  that there are no resources to undertake such kind of fundamental and applied research. In an interdependent world, blind opposition to foreign investment will not make much sense. 

If we don't want foreign investment for fear of some kind of colonization then we should be prepared to raise enough resources to make the necessary investments in infrastructure and other industries like steel, cement, computer hardware, infrastructure etc., and also be prepared to bridge the technological gap between India and other countries in the shortest possible time. The people should be taken into confidence and told that there are the economic costs which the country will have to  pay if foreign investment is disallowed.  And if the public were to calculate these costs it would find that it would run into billions of rupees.

Every political party knows that the country, at the current stage of development, cannot do without foreign investment. Therefore, it would be in the interest of the country to have a broad political consensus on foreign investment in India and if we wish investment to go into certain areas in preference to other areas then we will have to make investment in that area more attractive.  That is how the other countries in the Asia-Pacific region have achieved their economic goals.

In other areas like pension funds introduction of GM seeds etc., the Government must be allowed to move fast.  The GM seeds not only make crop resistant to certain diseases and to that extent reduces the use of pesticides but also increases the productivity.---INFA

(Copyright, India News and Feature Alliance)