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VIEWPOINT: KAUTILYA
Industry Badly Needs A Viagra
No longer an emerging market, India is fast becoming
a submerging market.
By Jairam Ramesh
Indian industry is
in dire straits. The rate of industrial growth has declined for six consecutive
months since December 2000. Actually, the slowdown goes way back to December
1999. Even more significant is the collapse of business confidence and
investor sentiment as privatisation flounders badly and reforms-fatigue
takes over.
Two types of responses to this crisis have been
forthcoming so far. One view is that global economic growth itself has
decelerated significantly and a 5-6 per cent rate of economic growth that
India might well register in 2001/02 will still place us among the world's
fastest growing economies. The other view is that we are now driven increasingly
by business cycles and it is only a matter of time before the upswing
starts as the effects of a good monsoon are felt.
 The
first argument is small consolation. India just cannot afford to grow
at anything less than 7-8 per cent per year, year after year for a decade
or two. Moreover, India cannot hope to prosper only on the back of a booming
services sector when the agriculture sector remains indifferent and industrial,
sluggish, which is what has happened in recent years. The argument that
India has slowed down because the world has is also weak since our total
exports constitute no more than 9 per cent of GDP.
The second view has some validity but we must
take note of the fact that downturns in the business cycle are getting
prolonged and the recovery less permanent. While allowing the process
of restructuring to proceed apace, the Government has still an important
role to play in reducing the downturn and lengthening the upturn period.
Industry has two standard suggestions: reduce
interest rates and increase import duties. The investment boom of 1992-95
took place when interest rates were very high. In the past year, interest
rates have softened. Moreover, with the pressure that is bound to come
on the rupee on account of the depreciation of competing currencies like
those of the east Asian countries, the natural instinct of the RBI would
be to raise interest rates to provide stability to the rupee.
The demand for increased import duties is on
dubious grounds since there is no empirical evidence to suggest that imports
are surging. In the mid-1990s, industrial growth accelerated as import
duties came crashing down with the exchange rate providing the compensating
cushion. As industrial growth slackened, import duties have, in fact,
gone up. Writing in the Business Standard, noted economist Ashok Desai
showed a close connection between protection and industrial failure. This
protection is also eroding our export competitiveness.
If the standard suggestions do not have much
merit, what then? First, agriculture still impacts on industrial growth
in many ways. Since the mid-1990s, agricultural growth has fluctuated
significantly and we have not had three consecutive years of good performance.
Agriculture continues to be strangulated by a number of controls on production,
processing, marketing and trade. The rate of growth of subsidies is about
three times the rate of growth of public investment in agriculture. It
is the structure of public expenditure at the Centre and in states that
is responsible for our inability to rapidly proliferate rural prosperity.
Second, while recognising that the Indian consumer
market has not evolved quite the way pundits expected a decade ago, industry
itself has to think of new ways of connecting with consumers. Writing
in Business World a couple of weeks ago, Rama Bijapurkar, one of India's
leading market research analysts, pointed out that many consumer goods
industries are facing saturation in urban markets but their penetration
in rural markets is still very low. Even in urban markets, the penetration
of refrigerators, for example, falls sharply beyond the top fifth of the
income category.
Third, "kickstarting" industry through
greater investments in key sectors like railways, power, roads, irrigation
and construction is a possibility specially since banks are flush with
funds and inflation is under control. S.L. Shetty, writing recently in
the Economic and Political Weekly, suggests a "pump priming"
of an additional Rs 15,000-16,000 crore a year over the next five years
in the infrastructure areas. But the key question here is whether it is
feasible to step up public expenditure both at the Central and state levels
when the nation's fiscal deficit is close to 10 per cent of GDP and also
whether it is desirable to do so in the present environment of financial
indiscipline and managerial inefficiency. Just spending more money in
railways, power, roads and irrigation without fundamental reforms in the
manner in which this spending takes place and in the method costs are
recovered is a sure recipe for getting ourselves into a deeper mess. A
new paradigm of public funding and private management needs to be developed
if pump priming is to be effective.
(The author is with the Congress party. These
are his personal views.)
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