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Journalism of Courage
MUMBAI, September 28: There is understandable concern all around about why significant new investments are not taking place in business in India and the much-needed adrenalin is not being pumped into the Indian economy. Our high profile Finance Minister, P. Chidambaram, is personally pulling all stops to desperately push up the rate of growth of the economy from the present level of 5-6 per cent.
Let us make no mistake, the investments are desperately needed to boost a sagging economy. As of today, we can do with additional power generation capacity of over 60,000 MW in the country. Our crude refining capacity has to be trebled, if we have to feel comfortable. We can do with twice as many ports as we have now to handle an ever increasing volume of traffic. Our roads and highways are creaking at the scams.
There is an enormous national appetite for infrastructure. But yet there is hardly any significant investment taking place in infrastructural projects. Nor are any major concrete project proposals taking shape in industrial intermediates, commodities and consumer goods. The recent formation of an Inter-Institutional Group, between the different financial institutions, to impart a special impetus to infrastructural investments has also all but come a cropper. Mind you, the gestation lag for an infrastructural project is much more than that for any other project. Therefore the lull and start-up problems in the very conception of new projects is unimaginably costly and is bound to cause too irreparable a loss.
Why is there this frigidity in the fructification of new investments? Particularly at a time when Indian banks and financial institutions are flush with funds. By all accounts, money is there for the asking now, if only you have a sensible project plan and a meaningful investment proposal. Why then is there this sense of slack?
When a company approaches a financial institution or a bank, you have to demonstrate your resoucefulness to contribute your mite also to the project. You have to make your own contribution, either as a proprietary concern, a partnership firm or as a body of shareholders, to the project. You may be able to raise a loan, or what is called debt, more readily because the banks and financial institutions are today lubricated with liquidity, but you still have to put in your contribution by way of equity. Now thanks to the prevalent atmosphere of political vindictiveness and recrimination, you can sense an unstated reluctance on the part of industrialists and promoters to come out with the wealth that they have stashed away.
The need of the hour, as we have said, is to put up infrastructural projects. Infrastructural projects are much more capital-intensive than the regular run-of-the-mill projects that our industrialists are much more at home in. Infrastructure guzzles a lot more cash than, say a project to manufacture an industrial intermediate or a consumer good. To cough up your share for an infrastructure project, therefore, means to contribute megabucks. It means coming out with your Swiss bank accounts. The pay-back period will also be much longer. It therefore means parting with your money and waiting for much longer to reap any dividend. But in spite of the much-touted Voluntary Disclosure of Income Scheme, there is a distinct reluctance on the part of the rich and the moneyed of the land to come out with their crores and millions.
More importantly, in the new era of tougher international competition and freer world trade, it is much more difficult for an Indian entrepreneur or industrialist to recover his capital in the initial import of capital goods and machinery itself. Over-invoicing of capital goods imports, as you know, has been the time-honoured way in which the average Indian industrialist has ensured his return on capital in the protected business regime of yore. To be able to do this merrily, you need to have a gullible and helpless customer to whom you can pass on any added cost. But today we have entered a new era of increasingly discerning customers, who are no longer helpless suckers for all that domestic industry choose to dump on them. The new customer is asking more and more penetrating questions. Today8217;s fiercely competing suppliers are also more than willing to call other8217;s bluff. In a marketplace that is taking on more and more of the demeanour of a killing field. Any perspective investor and entrepreneur, therefore, will be more anxious and concerned about the viability of his project and the likely rate of return on his investment. He needs to be clear about the best and worst case scenarios. He needs to have an idea of how the different variables that govern the health of his business are likely to behave.
It is in making these projections that we falter. Why? The reason is that we are not sure about the specific directions that government policy will take over a two to five year time frame. Sure, we know that we are headed towards a more liberalised and less regulated business regime. But are we certain about the fundamental axioms that will govern policy? No. We know that we are going to gradually reduce import duties and tariff barriers. But are we sure about duty protection for value addition. Can we be certain that the import duty that will be levied on a finished product will be more than that on a raw material or an intermediate? Even now the import duty on tyres is less than that on natural rubber, butyl rubber and rubber chemicals.
We are moving towards the slow dismantling of the Administered Price Mechanism APM for petroleum products. But we are not sure that the import duty regime of the future will maintain a suitable differential for value addition between crude oil and refined petroleum products. Given this uncertainty, how can Indian or international investors be expected to confidently put in major investments into the creation of the much-needed capacity in the country?
In spite of our being six years into the economic reforms process, there are any number of major projects which are still mired in the official quicksands of the central government. If projects that were desperately sought after are enmeshed in central government offices, you are wary of thinking about what must be happening at the state and local government levels. The language of liberalisation has not yet percolated down to the state level in our country.
Another fact reality that we have to face is that it is entirely possible for a competitor who fears the advent of a project to way lay it by litigation. Indian law unfortunately does not provide for any deterrence to wanton litigation.
Therein lies the rub. We used to say that we didn8217;t have a mixed economy, but a mixed-up economy. Now we are perhaps mindlessly hurtling down the path of economic reforms, without taking suitable care of the nuts and bolts. A little learning, we have studied in school, is a dangerous thing. A little liberalisation is equally dangerous.
The author handles corporate relations for a large business house
