The Hindu Business Line : Reforms thrust needed to buoy economy

THE Indian economy and the stock market have been on a roll in 2005. For the third successive year, the GDP growth is expected to top 7 per cent and one encore year is practically taken for granted. This despite the economic reform process barely inching forward, in the face of strident opposition from the Congress' coalition partners at the Centre.

The investment environment is, however, showing promise. The value of the announced capex plans by the private and public sector for the next four years is expected to exceed Rs 7-lakh crore or over 20 per cent of GDP, according to the Centre for Monitoring Indian Economy.

Unlike the 1994-96 wave of investments that fizzled out, there are two positive factors linked to the latest round of capex. One, it has been driven by high capacity utilisation level, which has topped 80 per cent or more in sectors such as metals or automobiles.

Two, nearly 50 per cent of the investment plans announced are to be financed through internal accruals.

This lends a greater degree of comfort to the project-start record and insulates the banking system from large-scale credit defaults.

The country also finds itself in a demographic sweet spot in the services arena. With over 200-million people in the working age group, there is potential for the software services success story to be replicated in outsourcing of auto ancillaries, pharma, biotech and telecom R&D.

There is the start of a consumption-led boom in retailing, FMCG and housing. As 250 million people are expected to join the middle-class in the next few years, the prospects for higher consumption and savings are expected to have a multiplier effect on economic growth.

In this backdrop, how to sustain this virtuous cycle of growth? The answer lies in some crucial reform decisions that will have to be taken this year.

Policy on FDI: The two niggling areas of FDI in retailing and insurance are to be decided during the course of 2006. The Group of Ministers headed by Mr Sharad Pawar is expected to meet on January 4 to debate the complete rationalisation of FDI norms.

As pension sector reforms and liberalisation of financial services have also been hanging fire, these will also be taken up in the course of discussions. If India has to capitalise on this and catch up with China on the FDI front, an early decision on these issues is crucial.

As the coalition partners, especially the Left parties, have fundamentally opposed every change in FDI, carrying them along will be the biggest political challenge.

The benefits of a liberal FDI framework have been evident in telecom and real-estate; Vodafone Plc., the world's largest mobile operator picking up a 10-per cent equity stake in Bharti Tele-Ventures for a staggering Rs 6700 crore ($1.5 billion) is an example.

Infrastructure impetus: Infrastructure in the country is strained to the limits, with the most telling example being Bangalore. In civil aviation, the pace of modernisation of airports and related infrastructure at Mumbai and Delhi to start with will decide the otherwise chaotic growth in the airline sector. The turnaround time for import/export of goods from ports is quite high and transportation by rail or road continues to be a nightmare.

No wonder, after a couple of years of scorching growth, commercial vehicle and passenger car sales are expected to slow in the coming year, despite huge latent demand. Progress has definitely been made with the Golden Quadrilateral and other road projects, but issues relating to land acquisition and flexible-financing programmes will bear watching.

Telecom, especially mobile telephony, has been a success story with few parallels. But the critical issue of spectrum allocation to mobile operators has not been resolved amicably between the GSM and CDMA operators for the past 18 months.

Given the congestion in the networks, lack of adequate spectrum may slowly affect the mobile subscriber additions in the coming months. In the oil sector, as refining companies have been forced to bear the burden of higher oil price and subsidies relating to LPG/kerosene are yet to be rationalised, they continue to pay the price of high regulatory risk.

Electricity and labour reforms: Power sector reform, a lynchpin for manufacturing, has remained a non-starter. Creating the right conditions for attracting FDI has to remain a priority in this sector for the next few years, as demand outstrips supply by a wide margin. India is staring at an annual outlay of over $10 billion in power generation alone for the next few years.

Fuel availability and linkages will also remain a crucial issue. The Electricity Act, 2003, which sought to unbundle power generation from distribution and transmission, has made little progress.

For the manufacturing sector, the inflexible labour policy has hindered efficiency and productivity among companies. The low productivity has forced several manufacturing companies to resort to large-scale automation and efficiency improvements, which have led to largely jobless growth. As Dr Shankar Acharya, a former Chief Economic Advisor to the government, says, the Indian manufacturing sector has failed to provide a large number of blue-collar job opportunities. As labour policy reform is likely to be bitterly contested by the coalition parties, and trade unions remain a powerful force, the path ahead is bound to be difficult.

Privatisation/disinvestment: The 10-per cent sale of the BHEL equity, which the government was forced to put on the backburner on opposition from the Left parties has derailed the disinvestment process. Though Maruti and Rashtriya Chemicals, along with a few other non-Navratnas are being lined up for disinvestment, the government is still staring at a big hole in funding for social sector projects such as education and primary healthcare. The National Investment Fund created for this purpose will be handicapped without requisite resources.

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