The Hindu Business Line : Capital surge

Barely two decades ago development economists saw capital shortage as one of the roadblocks to India's protracted journey beyond the so-called `Hindu rate of growth' of 3 per cent. Scarcity of capital and the low rate of gross capital formation determined just about every policy during the licence raj, distorting incentives and limiting capacity by fragmenting it. With domestic industry sourcing capital solely from term lending institutions or the capital market under stringent conditions, it was hardly any surprise that Indian industry never matched global standards of quality or size.

All that seems ancient history in the light of the phenomenal growth of the last four years. With an average annual growth of around 7 per cent, and a promise of 8 per cent — at the very least — this fiscal, it is not just gross domestic product that is rising. Happily GDP growth has been predicated not simply on the hearty inflow of global capital by way of foreign direct investment (FDIs) but, more significantly, a robust increase in the size of domestic productive capital. The story of India's growth over the last three-four years is as much a saga of surges in the quantum of capital available for investments from local sources. Data show that gross domestic capital formation (GDCF) spurted from negative levels — minus 18 per cent in 2000 to 20-30 per cent three years later; even better news was the growth in public sector GDCF from a negative four per cent to a healthily positive 11.8 per cent. At these levels of capital expansion, investments too have been up at a brisk pace, of around 15 per cent, scripting in effect the second fastest growth in the world after China. With the massive build-up in forex reserves and an increasingly liberal environment for capital outlows, India's corporate investment profile has altered radically with investments in the domestic economy reaching stratospheric levels and rising dramatically in the global markets too; the latter trend should turn more than a few companies into global entities.

The dramatic turnaround in capital formation and investment is thanks to the reform process and the progressive dismantling of the complex system of controls, swiftly in some sectors, and slowly in others. Businesses once reserved for public sector monopolies— telecom, airports, ports, roads— were thrown open to private investment, with the telecom arena being a success beyond expectations. In retrospect, those reforms were the easier part of policy-making. Now comes the tough part. If growth has to transcend itself, and only thus become "inclusive," those structural reforms, especially in the farm sector, that every government has tiptoed around have to be addressed on a war footing. If neglected, as they have been all these years, a capital starved agriculture may just pull the economy off its high perch.