Everybody’s invited

The lawyer in Finance Minister P. Chidambaram has helped him argue his case with admirable dexterity. In his Walk the Talk interview, he made the compelling argument that the real issues of promoting growth in the Indian economy have got sidetracked in the excessive focus on disinvestment and stock market behaviour. Indeed, as he put it, he wants to be seen more as a minister for investments: “My experience, whatever goodwill I have, must be to invite capital, foreign, Indian, private, public, make them invest.” This could, possibly, be read as Chidambaram’s mission statement. The words are significant in that they make no distinction between investments that are foreign in origin, and those that are of domestic provenance. After all, capital has no colour and an act of investment is the same whether it comes from outside the country or inside it. Inviting foreign and domestic investments also entails similar policies, as such investors essentially face the same problems on taxation, infrastructure and the general environment.

But Chidambaram must know that his efforts to step up investments are indeed daunting, given the sluggish pace that has marked them of late. The domestic rate of capital formation is 23.3 per cent of GDP at market prices, which is still below the peak levels of 26.9 per cent in 1995-96. Officials have been talking of a revival of investments, but there are no hard numbers to establish the pick-up. The outlook on foreign direct investments is no different as they stagnate between $3 to 4 billion, when the need is for inflows close to $8 bn to $10 bn to underpin the targeted rate of GDP growth. The finance minister, therefore, rightly observed that the economy can absorb FDI levels that are three times higher than the current levels. If the problem is to raise investments, a far bigger one is to attract those with the maximum employment potential. But can one cherry-pick only such investments?

The finance minister seems to feel that some direction can be provided in order to get manufacturing into “desegregated production” — or, in other words, to move plants to small towns and rural areas to generate employment at the grassroots. This will certainly entail fine-tuning excise taxes and shifting their incidence unit-wise to that of the company. But, more generally, investors respond to a stable policy environment. If they are ensured of a regime of moderate taxation and investor-friendly regimes at the state-level, they do respond favourably. The finance minister’s challenge then is also to persuade the states to be in sync with his forward-looking orientation. If his counterparts at the state-level also similarly re-fashion their priorities, the entrepreneurial spirit — which is basic to a high growth trajectory — could indeed be re-kindled.