The Government, by playing a bigger facilitative role in mediating among stakeholders with conflicting claims, alone can help revive the investment cycle.

In his first official statement after taking over, the Finance Minister, P. Chidambaram, has said just what India Inc would have wanted to hear. He has spoken of things such as a non-adversarial tax regime – the merest hint of a dilution in the new general anti-avoidance rules (GAAR) and a review of retrospective provisions in the tax laws – unveiling a clear path of fiscal consolidation, and taking “appropriate steps” to bring down interest rates. The homilies on public finance that Mr Chidambaram has resorted to, only underscores the difficult path that lies ahead of him. Not that there is little sense in what he had outlined. For instance, GAAR may not be a bad idea, but the time for it – just as other tax measures to which foreign investors have not taken very kindly – is perhaps not now. Similarly, Mr Chidambaram is not wrong about the necessity to take “carefully calibrated risks” with regard to interest rates. The current high rates, while not doing much to control vegetable prices, for instance, are inhibiting investors and burdening all borrowers – be it manufacturers of goods, home and vehicle buyers, or students taking education loans.

But all these proposed moves, useful though they may be, do not address the real problem. And that is not about foreign capital flows drying up: Foreign institutional investors have actually poured in over $ 15 billion into Indian equity and debt markets so far in 2012. The real problem afflicting the Indian economy has to do with the near-collapse of its investment cycle, which cannot be set right merely through friendly assurances over GAAR or even lowering of interest rates. Corporates, to put it simply, have lost their stomach for putting money into large projects. Getting those excavators, bulldozers and cranes roaring again – to attain the 38 per cent investment rates of 2007-08 that Mr Chidambaram alluded to – requires the Government to play a much bigger facilitative role. Many projects are stuck today only because of wrangles over land acquisition or other disputes involving various stakeholders. Mediating between these often conflicting claims is something only the Government can effectively undertake – provided it has the will to do so.

It is equally important for the Government to identify select infrastructure or mega projects with demonstrable multiplier effects – the Delhi-Mumbai Industrial Corridor, for instance – on which to focus its attention, and remove bottlenecks coming in the way of implementation. In this, it can probably take a leaf out of the Golden Quadrilateral highway project connecting the four major metros. It was launched in 1998, just after the Asian currency crisis, by which time the earlier mid-nineties investment cycle had also come to an end. Over the next few years, as the national highways programme got extended beyond the quadrilateral, it set the stage for the private sector to take over and fuel the unprecedented investment boom from 2003-04 to 2007-08. That lesson may be worth revisiting.

(This article was published on August 7, 2012)
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