The Hindu Business Line : Investment boom had begun to set in 2003-04 itself: Report

Reality check
From 28% in 2003-04, investment rate rose to 31.5% and 33.8% in 2004-05 and 2005-06.
EAC applauds change in ‘trajectory of investment’ as ‘truly enormous’.
Says with adequate power, much more manufacturing capacity might have come up.

G. Srinivasan

New Delhi, July 19 The scorecard on the economy and the synoptic shots on current challenges and prospects spelt out in the Prime Minister’s Economic Advisory Council, headed by Dr C. Rangarajan, has not come a day too soon lest the general euphoria of brightening growth prospects should lull the authorities into any false sense of complacency.

Even as the Prime Minister, Dr Manmohan Singh, had been quite critical of “investment famine” during the non-Congress regime from 1998 till he took over in May 2004, the EAC points out that starting from an investment rate of 28 per cent in 2003-04, the momentum of investment expansion gathered steam, rising to 31.5 per cent and 33.8 per cent in 2004-05 and 2005-06.

This bears out the merit in the erstwhile Government headed by the NDA alliance’s “India Shining” campaign in the run-up to the 2004 General Elections. The legacy of strong growth left by the previous Government had helped push up the investment rate on a sustained basis so much so the EAC applauds “this change in the trajectory of investment” as “truly enormous”.

Investment rate

In 2006-07, the final year of the Tenth Plan, the investment rate ratcheted up into the upper half of the 30s, with provisional estimates registering a figure of 35.1 per cent. Since 2002-03, real investment has grown by double digits in every year for the past five years, averaging more than 17 per cent between 2002-03 and 2006-07, the report contends, giving tacit credit to the last two years of the NDA regime for managing this feat.

Verily, “the investment boom had begun to set in 2003-04 itself and has gained considerable momentum thereafter”, the report notes in a bipartisan spirit and without any tinge of earning the displeasure of the extant dispensation. It is this acknowledgement of sound economics by professional bodies like EAC that gives hope of the economic reforms initiated 16 years ago would be here to stay.

The report argues that in many sectors, investment is taking place to foster additional capacities to meet rising demand, even as infrastructure continues to be a stumbling block, and warns that “the large and palpable deficits in physical and social infrastructure” would be the most important constraint to sustaining high rates of growth.

Power points

Hence, its assertion that “if adequate attention is not paid to augment infrastructure, particularly power supply, overheating might persist on account of productivity and supply constraints”, since power is the be-all and end-all for every economic activity.

Though the EAC talks about agriculture, employment, financial and external sectors at length to drive home the importance of instituting the requisite reforms to make each segment efficient and deliver results, it is the emphatic focus on the power sector that needs to be expatiated upon.

While acknowledging some gains made in the reform of the distribution system with metering (at different voltage levels) being much more ubiquitous than before, it says the level of aggregate technical and commercial (ATC) losses is still too high for basic economic viability. Private investment has not been as forthcoming in the sector, as it has been so in the case of telecommunications or in manufacturing.

Special difficulties

The report hit the nail on the head when it observes that “this has led to a piquant situation where it has been mostly the public sector that is involved in investing in new generation capacity. Not only does this greatly diminish the potential investment that the economy as a whole could make in capacity augmentation in the sector, but it also imbues it with the kind of special difficulties that arise from the idiosyncrasies of Government agencies and systems”.

Moreover, large slippages in installing capacity have created an inadequacy in the supply of power that has not only led to power cuts but also to setting up of large and expensive captive power generating units.

The report also surmises that had adequate power been available, much more manufacturing capacity might have come up.

“There has thus been both a real and opportunity cost resulting from the inadequacy of generation”, it said, adding that there is an urgent need to radically enlarge the scope of power generation over the Eleventh Plan which should be in the realm of one lakh MW for the present Plan, going up to a cumulative total of 3 lakh MW of incremental capacity creation by the end of the next decade (2020), the timeline for India to emerge as a developed economy!