Indian
Economy in perspective:
People’s commitment - The need of the hour
The irony of today’s
democracy is that, year after year, we are witnessing a hung parliament. This demands the
PM of any coalition to keep himself always busy managing the contradictions between the
various allies and the compulsions of his own parent party. He does not have the necessary
mandate to have the important bills passed in the parliament. The economy therefore
remains in a limbo as has been the case for the past 3 years.
Indian and Foreign
businessmen have run out of patience and are not going to wait on and on. These
investments can be expected to migrate to other Asian markets.
These countries will thereafter access the Indian market by
exporting their produce to India with obvious financial benefits to themselves. Already
investments though in small measure, have started migrating to Sri Lanka. There are many
littoral countries in the Indian Ocean waiting in the wings for such god sent
opportunities. These countries, being small in size, suffer no disadvantages of gigantic
bureaucracy and fragmented polity which have become the mainstay in India.
The service sector is one serious area requiring everybody’s
attention. Banking, reinsurance activities (thanks to internet, e-commerce etc) are some
of the businesses which can easily be operated from a virtual office and do not require an
address within India. Also it must be remembered that post Pokhran-II, Indian business is
finding it more and more difficult to access cheaper foreign debt. Under such
circumstances, investments in a third country would offer a natural solution. A look at
Essar Steel’s condition of default would explain the pathetic condition a promising
steel plant has come to. Even domestic financial institutions do not have the wherewithals
to secure their own exposure in the project. This and many more similar examples only go
to compound fears of possible flight of western debt and capital to various destinations
in other Asian Countries for an indirect assault on the Indian market
The buyer has certainly started visiting the market. The BSE
index after being in the death valley for an extra long time has finally started showing
signs of good health (it currently stands at a +4500 level with predictions of rising).
With the black market rate still at only 20%, it is some solace that the present level of
BSE index has been achieved even without the support of speculators and is in fact founded
on good fundamentals. The market for cyclicals like cement has improved and so also
the automobile sales have picked up. But it would be premature to conclude that the Big-F
(feel good factor) has taken a firm seat. The agricultural production has, no doubt, been
good and that has helped in building up the rural demand. But the big question is---Will
this upswing in the economy sustain or will it be another passing phase?
The answer is how strong a PM the forthcoming
elections throw up because the gap between smart polity and good economics is
disappearing.
Agricultural Sector:
We have spent the first 50 years in consolidating our
agricultural and industrial production. The agricultural production today stands at 203
million tons but we are still so dependant on the vagaries of weather that
self-sufficiency still remains an alluding scene.
Over the years, the land holding per family has come down
drastically. In the countries’ granary, Punjab, the problem is serious. With family
size splitting up (brother to brother), the level of land holding per family is so low as
less than 2 acres per family. As a result of this low land holding, the farmer is not able
to invest in tractors, fertilizers etc, nor does he have the wherewithals to exploit the
advantages thrown up by technology. The agriculture sector when taken up as an industry,
would encourage downstream diversification. The wheat produced can be taken up for
manufacture of ready to eat food.
Crop Insurance, an other spin off that would come by treating
agriculture as an industry, is a subject receiving media attention but it is too early to
conclude if the farmer has started applying this on a large scale. In events of repeated
bad monsoon or rain failure, the farmer diverts his past earnings to many unproductive
purchases instead of investing on the field for fear the monsoon would fail once again.
The farmer needs proper motivation to exploit this facility of crop insurance so that in
an event of repeated monsoon failure, he is not demoralized and he does not fight shy of
investing in fertilizers etc at the time of the next crop.
Treating agriculture as an industry would also help in looking
into aspects of handling and transport. Punjab the nation’s wheat granary has surplus
production far excess of local demand and the farmer is naturally not getting the desired
returns (only Rs.500 per quintal). Lack of adequate storage facility prevents storage of
grains for future selling in an environment of scarcity. It is an irony that while wheat
is wasted on rats in Punjab, 200million people elsewhere in the country are still
starving. A freight pool and proper marketing network to even out the market demand-supply
discrepancies can go miles in alleviating this problem. Unfortunately this problem remains
unattended because while food production is the responsibility of the Ministry of
Agriculture, distribution is the responsibility of Ministry of Civil Supplies. This is a
typical example of left hand not knowing what the right hand is doing!
Service Sector:
The thrust should now be on service sector. It ought to be
remembered that only agricultural sector as well as service sector can offer the maximum
opportunities for employment. Manufacturing sector does not match these two sectors in
this regard. Take a look at what Maruti employs at its Gurgaon facility and it will be
seen to be a miniscule when compared with the employment opportunities offered by the
various marketing and servicing facilities/franchisee companies spread out over the entire
length and breadth of the country. Examples of service oriented economy are Singapore,
Hongkong and they are doing fine. Closer home Bombay offers a good example. By the same
token, we receive a lot of money (US$ 12 billion) as worker’s remittances. Till
yesteryears the inflow was essentially from the Indian workers employed in Gulf nations,
but now there are software engineers in US and UK adding to the list. The next Finance
Minister should look into this and start addressing their problems. In fact the PM can
appoint a minister of cabinet ranking to exclusively oversee this sector.
Industrial Sector:
Import substitution took us on the path of self sufficiency. But
all this came at a very high cost and we ended up with an inefficient system. We worked in
a cost plus environment and there was no incentive to become cost conscious. (Remember how
the car manufacturers would flock year after year to the tariff commission and get their
annual dose of price hike; similar rituals were followed by the steel, cement, sugar
industries-the list is endless). This attitude has put us behind by 20yrs.
I had observed that in a factory manufacturing various types of
broaching tools, the rejection is as high as 5%. The cause being only human error. This
adds to the cost of production resulting in the company being unable to face competition
from cheaper imports. Automation is the obvious solution, software for which is now
readily available in the country, but the company’s executives are reluctant to adopt
the solutions for fear of loosing their job due to worker and staff redundancy.
By giving importance to the service sector, one does not intend
underplaying the importance of the manufacturing sector. This sector after all offers
tangible assets. It is, no doubt, important to offer a level playing ground to the
domestic manufacturers and also protect them from nations indulging in dumping.
Taxes have to be rationalized. The manufacturer is paying
taxes at various levels. As an example, take a look at the cement industry. They pay
royalty for the limestone quarried, then they pay taxes at various other stages of
production ie on the power, water, spares consumed. Then at dispatch stage they pay
excise, sales tax on the product. These taxes also differ from state to state. This
inhibits cross movement of produce from state to state. Similar protests are expressed by
automobile, white goods and other industries. No one disputes that the state aspirations
should be given its due, but certainly an amicable solution must be found by a properly
constituted panel of tax experts to avoid repeated taxation. A one stage tax will augur
well for a lower product price. This will lead to higher consumption level and
consequently a higher demand and a higher tax collection. Higher demand will also promote
a boost for much needed project investment. In this regard, it would also be worth
studying the tax structure of countries accused of dumping and draw some inferences from
there. Then there are also some anomalies which need government’s scrutiny, like for
example issue of double taxation of services rendered by foreign companies for market
survey conduct by themselves for potential markets in their respective countries against a
request made by a domestic company. Then there is the question of why such expenses as
also advertising expenses can not be treated as investment for tax computation. Once this
problem is addressed and a level playing field is delivered then the government has full
liberty to demand that the manufacturing companies either shape up or ship out.
Public Sector disinvestment is an issue flogged by every
Finance minister and no appreciable success has been achieved. The market condition not
being conducive is the common refrain. By conservative estimate the gold stock in public and government hands totals about 15000 tons of
which the government holding is only 6000 tons and the balance is with the public as some
measure of security. If custom duty and levies on gold are removed, the domestic prices of
this yellow metal can be brought at par with and move in tandem with international prices.
The public would then find it sensible to liquidate these holdings and shift their savings
to equity and real estate market or some alternate destinations. This would heat up the
equity markets and thereby enable LIC and its subsidiary to invest in the equities. At
present, the investments made by these institutions are languishing far below their
allowed levels.
Interest rates are indeed very high if we are made to believe
that the inflation rate is really falling below 2% level. Consumption pattern has
undergone a sea change, but the commodities in the basket and their respective weightages
have not seen any changes since ‘84. The computation of inflation rate by itself is a
therefore a jugglery. For an entrepreneur, what is important is study of demand trend and
the lag between supply and demand. There are several agencies to investigate causes
whenever prices are skyrocketing ie when there is a bull run but there is no agency to
investigate causes for price-crashes. Interest rates are no doubt important but takes a
position secondary to demand and price realization. Whatever be the interest rate no
businessman in his right senses will borrow from the bank to invest in projects when the
price realization is poor.
Distribution network for agricultural and industrial production
as well as natural resources is an issue requiring attention of all. We, Indians, are
experts in the field of construction of mammoth production and storage facilities but we
fail miserably when it comes to setting up distribution networks to take the produce to
the remotest nook and corner of the country. Is it not a shame that we have 3600 dams (3rd
largest in the world) brimming with water, yet when one part of the country is flooded,
200 million people (one fifth the population) elsewhere are crying for drinking water. See
Punjab where the market is flooded with wheat, 200 million people elsewhere are dying of
starvation. A similar mismatch was observed in 60s in the nation wide demand for cement.
While cement was in surplus in the South, there was severe paucity in the North. While
producers in South were not getting remunerative returns, the traders in the North were
selling at high premiums. The producers in North and South along with the government got
their act together and came out with an innovative freight pool system. Today the system
has been dismantled, of course only after the mismatch has been removed. This distribution
network has taken cement demand to above 90million level. Now respective cement
manufacturers (L&T, Ambuja, Saurashtra cement cos) are working individually and taking
the sea route to carry cement from surplus market in Gujarat to deficit areas in South.
With a country blessed with perennial waterways, robust railways and network of various
highways, it only needs a commitment from the people to design a good distribution network
for carrying the produce to the village level outlets. Internet, e-commerce (B2B and B2C)
are only going to add pressure on people to get their acts together.
| Bottom line is that if we are to see
sustained upswing in the market, the forthcoming elections should throw up a strong and
able Prime minister to enable him to select a cabinet of his choice and people's
commitment is equally necessary. |
Ramesh Natarajan
13.8.99
The writer is a free lance Engineering consultant.
