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Needed – Reform For Disruptive Economic Growth

In this feature IE suggests a few steps to stimulate economic growth. It points to opportunities and challenges. Even as the issue was being sent for printing we came across the welcome and pleasant initiatives of finance minister Nirmala Sitharaman. In her lucid presentation, she pointed to rolling back some of the harsh measures she introduced in the budget for 2019-20. I refer to the important ones:

On the tax and investment front, Sitharaman has withdrawn the surcharge on foreign portfolio investors and the angel tax for registered start up companies. Continuing with prime minister’s appreciation of wealth creators, the finance minister announced a series of measures to meet the criticism of tax terrorism and harassment: a centralised computer system will send notices, summons, orders … on tax matters eliminating the human interface. A computer generated unique document identification number (DIN) will ensure clarity and transparency. She also assured that all notices will be disposed off within three months starting from 1 October.

The new measures also addressed correcting the listless functioning of banks. Public sector banks promised infusion of Rs.70,000 crore of capitalisation upfront. There has been wide complaints that banks do not pass on the reduction in repo rates (the rate at which RBI lends to banks) to the borrowers. The PSBs also directed to link lending rates to the repo rate; additional liquidity of Rs.20,000 crore for housing finance companies would help expand retail loans.
Public sector banks are now expected to provide relief to non banking finance companies- they can lend jointly to retail borrowers and acquire NBFC’s retail portfolios.

The automobile industry making the loudest complaints over the steep decline in demand, welcomed the improvement in customer sentiment. The easier liquidity will help the industry to regain the momentum lost in the coming festival season.

The harsh budget proposal to treat CSR violations as criminal offences is withdrawn. The eloquent and well-presented reliefs by the finance minister are well-received; but a lot more needs to be done. We have outlined some of these.

The massive mandate received by the BJP and its allies in the 2019 elections has imparted stability and strength to governance. True, this comfort came in 2014, after 25 years of unstable coalition governance. But there was a severe constraint: lack of majority for the BJP in the Rajya Sabha. In the divisive Indian polity, it was not possible to bring about consensus on most issues. The opposition parties had a single agenda – of opposing any and every bill. The BJP also did this when it was in opposition during 2004-14. The present government, formed after the 2019 elections, has gotten over this disability as well. Look at the comfortable passage of legislation relating to Triple Talaq and Kashmir! Sadly the smooth passages of these Bills have only exacerbated and further increased the antagonism of the opposition to the government’s actions.

The major preoccupation of the government will be with bringing about normalcy in Jammu and Kashmir. It is bound to be tough and long-drawn. The regional parties – the National Conference and the PDP – the Jihadis and sections of Kashmiris will continue to oppose the repeal of the special status. Of equal concern is the reaction of other nations to this move. More serious, of course, is the threat from Pakistan, which opposed the accession of J&K in 1947. For over seven decades, Kashmir has been kept on the boil through cross border terrorism, humongous loss of lives and massive defence expenditure that could productively go for development. Thus the efforts of the government had to be focused on the Kashmir issue.

FOCUS ON DISRUPTIVE, huge ECONOMIC GROWTH

There is urgency and imperative to focus equally on economic development. Compared to the spectacular growth achieved by our neighbor China over the last two decades, India’s record has been modest. The country has not drawn its potential. The good relations built by successive prime ministers, from Vajpayee through Manmohan Singh to Narendra Modi, with leaders of foreign countries had not been matched by the more abundant flow of investments and trade. India continues to suffer from an inability to manage surpluses of even her modest volumes of production. The size of our companies continues to be small, denying competitive strengths and focus on innovation, research, and development.

Finance Minister Nirmala Sitharaman and other ministers handling industry, commerce, infrastructure, etc., should introduce measures aimed at a quantum jump in economic growth. There is a need for disruptive growth and focus on building global sizes and volumes across sectors. These should be achieved by the focus on ease of doing business, a benign tax system, improving productivity and implementation of projects to tight, short time cycles. China’s strength has been built on the last item – in just around 15 years, crowded, old cities have been converted into metropolies with thousands of high-rise buildings, multi-lane highways, dazzling railway stations, bullet trains, copious power supply and other urban infrastructure.

A significant impediment relates to the acquisition of land and making it available at modest prices. The present government should attend to these on priority. By all means, give a fair compensation at market value and, where possible, alternative lands; but don’t permit stalling vital projects by unending litigation. See the box item on stalled projects in Tamil Nadu and the article on a crucial 500-meter link denying vital rail connectivity to several lakhs of commuters in the Chennai MRTS (PP 18-19).

Does bajaj want a BUFFER STOCK FOR AUTOS?

The pre-1991 mindset of dependence on the government continues. Listen to veteran business leader Rahul Bajaj: “there is no demand and no private investment. So, where will growth come from? The auto industry is going through a challenging period. Cars, commercial vehicles and two-wheelers are going through a rough patch.”

For five years in a row from FY 2015 to FY 2019, Bajaj Auto has been recording impressive growth (except for a blip in 2016-17). Revenues increased to Rs 31,899.27 crore in FY 19 from Rs 22,198.22 crore in FY 15 and profit soared to Rs 4675.18 crore from Rs 2813.74 crore during this period.

The company has also established lucrative markets in several developing countries. Its three-wheelers are popular in countries like Egypt. Bajaj Auto, producing two-wheelers and three-wheelers for over 60 years and positioned among highly profitable companies, should be aware of business cycles. It has the resources and capabilities to tide over the years when demand shrinks.

Surely Rahul Bajaj should be aware that auto companies in developed countries do not routinely blame it on their governments for any and every slowdown. Does he expect the government to build buffer stocks of the myriad models like the government does for foodgrains? Until 2000, his company spent precious little (0.17 per cent of revenues) on R&D. In the last couple of years, it has increased this to just around 1.5 per cent). Companies should focus on innovative strategies, R&D, product improvements, cost reduction and exports to tide over such a dip.

The first thing most of our business leaders and industry associations do on any market slowdown is to ask the government to subsidise and take their burden on it. More than others, the automobile industry has been extended a lot of protection. Look at the import duties, exceeding 100 per cent levied on fuel-efficient hybrid cars.

The problem of Indian businesses relates to their small sizes. High volume production has given China the advantage of lower costs and competitive strengths. There is the imperative to select industries, which have the edge in terms of raw materials, labour and the needed infrastructure to build high volume production. The government, on its part, should have a favourable tax policy to help such sectors to grow. A liberal investment allowance, coordinated support by the Centre and the state concerned and a mechanism to monitor and aid the quick establishment of such projects would be necessary. In the attached box item, an outline of such an approach for select sectors has been provided. These relate to reducing avoidable imports and stepping up exports.

MEETING THE TRADE DEFICIT…

China gained considerable strengths and clout by building large surpluses of exports over imports. For India, the picture is in contrast with imports substantially higher than exports. We present the figures on India’s top ten imports and top ten exports. A third of the imports go for mineral fuels. After the big break in the 1970s at Bombay High, the country didn’t have significant additions to crude oil production. The increase in indigenous production accounts for just around a fifth of consumption. IE suggests some measures to expand exports as also to save on imports.

Reliance Industries set up two large world-class refineries that efficiently refine crude oil into petroleum products. The handsome refinery margins helped in the export of these at favourable prices. Thus mineral fuels are also the largest foreign exchange earner that constitutes nearly 15 per cent of India’s export income. The recent significant investments of the world’s largest petroleum company, Saudi Aramco in Reliance Industries, would assure copious supplies of crude. One may look forward to the possibility of much larger earnings through petroleum product exports. The public sector oil companies are also installing large capacity to a global scale. The advantage of handsome refinery margins could be leveraged to build large exports of petroleum products.

India has emerged the third-largest producer of drugs and pharmaceuticals. Her ability to produce a vast range of generic medicines at competitive prices has helped the sector enjoy significant exports. There is the potential to achieve quantum jumps in such exports through special incentives. The urgent need here is to create large capacity of several specialty chemicals which are imported.

ATTEMPT QUANTUM GROWTH IN STEEL…

Despite long years of experience in the production of steel and with rich endowments of iron ore and other necessary raw materials, the country has been slow in creating large capacity in iron and steel. Hardly three decades ago, the capabilities of steel production for China and India were modest and comparable (15 & 10 million tonnes respectively). Today China produces close to 60 per cent of global steel production and is miles ahead of India’s. China supplies steel and steel products at competitive prices. The slow build-up of capacity in India has made the country a net importer. Over the short and medium terms, it should be possible to achieve a quantum growth in steel capacity which would, in turn, stimulate the expansion of the infrastructure, housing, transport and multiple other sectors.

The country has scaled great heights in IT software and has gained global recognition. Disappointingly, the record in terms of hardware is abysmal. Despite India accounting for large consumption of electronic equipment like computers, these are mostly imported. Assembly of these by reputed companies like Dell is import-intensive. Suitable policy changes can help to establish component manufacture. The changes noticed in large scale production of cell phones could be replicated for a large number of other electronic products. Most of IT software goes for exports. A progressive increase in using this for Indian use should be encouraged.

Size and volume are of paramount importance. Government policy should be tweaked to encourage building large capacities; whether this relates to chemicals and petrochemicals, iron and steel, synthetic fabrics, plastics and plastic products, medical apparatus…

The strengths of India in agriculture also need to be exploited in full for exporting agri-products and processed food.

Fiscal policy should be aligned to stimulate investments with liberal incentives.

The economy has remained sluggish for nearly a decade. Measures indicated can help to step up the production of a wide range of goods. Simultaneously a massive step up in infrastructure investments – railway, road, seaports, and airports will be needed.

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