인도·남아시아

Growth momentum has to be maintained

As the countdown for Budget 2005 has begun, one starts thinking of the priorities for the exercise.

Here are some random thoughts.

A major priority for the finance minister would be to consolidate and strengthen the rather fragile growth momentum of the Indian economy. After clocking an impressive 8.2% growth in 2003-04, the rate in the current year has been weakening somewhat and is likely to be about 7%.

The finance minister would do well to announce an increase in public investment, especially in infrastructure development, to boost demand for industry and spur growth. The compulsions of reducing fiscal deficit need not constrain him. This is because targets such as 5% pushed by Bretton Woods institutions are at best rules of thumb with no theoretical basis.

Different economies have their own optimal levels for deficit that are not inflationary. Since inflation in India is currently under check and oil prices are falling, there is no reason to worry. Public investment in infrastructure, besides beefing up demand for the industry, will also address the supply constraints of infrastructure that have been holding back the growth of many an industry. It will also crowd in foreign direct investment (FDI) and domestic investment and hence boost sustainability of growth.

Another Budget priority could be to give a strategic direction to India’s emergence as a competitive manufacturing hub. In view of our need for generating jobs, we need to exploit the potential of export-oriented manufacturing like China. Leaving aside conventional export-oriented industries such as textiles and clothing, gems and jewellery, Indian enterprises have little presence abroad except in pharma, automotives and components. In India, the industry’s share in GDP is rather low and has actually gone down from 27.9% to 25.9% over 1991-2002. China, on the other hand, derives more than half of its GDP from industry and hopes the proportion will grow over the next two decades.

The development of export-oriented manufacturing requires a combination of policies. These in-clude a strategic thrust to promote excellence in the domestic corporate sector. Enterprise dynamism has a role to play in producing export successes. Hence, policies should help in nurturing world-class enterprises or national champions in select sectors. These champions could be assisted to grow to world-scale and compete worldwide with their own brands, acquisitions. They could be selected on the basis of their past performance in export markets, professionalism, innovative and brand-building capability, and potential to emerge as leading enterprises internationally. They could be assisted in several ways by various official bodies, for instance, by the financial institutions for preferential access to funds for overseas takeovers, expansion of production capacity; brand-building and market development projects; and support by Indian missions abroad in market information and investment opportunities.

Second, RIS empirical studies have emphasised the critical role of in-house R&D for strengthening enterprise competitiveness. In developed countries, governments spend billions of dollars in R&D subsidies for national enterprises to shore up their competitiveness. Such subsidies, upto 50% of project costs, have been made non-actionable under WTO rules. In India, we have been encouraging R&D mainly through weighted tax deductions in certain industries. It is argued that more direct support in the form of R&D subsidies for specific projects, thus strengthening the competitiveness of domestically-owned enterprises, may be desirable.

Third, inward FDI policy needs to be fine-tuned to exploit the potential of export-oriented FDI. In China, FDI accounts for 55% of its manufactured exports and as much as 80% of high-technology exports. In India, this proportion is marginal at 8-10%. Studies have shown that export-oriented FDI is driven by different factors than domestic market-seeking FDI. What is needed is a combination of proactive promotion, incentives structures, and selective policies to prompt MNCs to make India a global or regional production hub. Our ability to offer to MNCs access to a large and expanding domestic market, besides other resources such as low-cost but high quality human resources, needs to be leveraged for getting them to consider India as a base for export-oriented production. Countries like China have effectively bargained with MNCs, tying up access to the domestic market with export obligations.

While FDI needs to be promoted, foreign investment associated with foreign institutional investors (FIIs) in Indian stocks needs to be discouraged. With one of the best performing stock markets in Asia and an appreciating currency, India is attracting increasing attention from FIIs which invested over $8 billion in Indian stocks recently. These investments, by their very nature, are highly volatile hot-money inflows seeking a quick buck from cyclical movements in stock prices and currency speculation. Excessive exposure to them is undesirable as it tends to build a bubble when they flow in. For instance, profit booking by FIIs and hedge funds was largely responsible for the January 5, 2005 crash of the Indian stock markets. Such instability is highly disruptive.

Further, inflows of FII investments also lead to appreciation of the Indian rupee, thus eroding the international competitiveness of Indian exports. The finance minister could consider imposing a hefty transaction tax on FII sellings of the type of an ‘exit load’ to moderate the instability brought in by them. These are flows we can do without.