The Budget and the Economic Survey have emphasised the need for investment and export led growth. There is, however, no fiscal stimulus as fiscal rectitude is being maintained.

Recapitalising public sector banks with ₹70,000 crore, restoring health of the NBFCs, leaving more funds with the banks with government itself borrowing overseas for the first time, and steps to strengthen the bond market, are intended to get the financial sector into good health so that higher levels of private investment can be readily financed at lower interest rates.

The RBI has also been reducing the repo rate. The moot question is whether this would suffice to get investment rates to rise, or, could something more be done.

One easy measure which would have a major impact, would be for the RBI to begin undoing the large real exchange rate appreciation that has occurred over the last five years. Perceptive observers, including the former Vice-Chairman of NITI Aayog, a former Chief Economic Advisor and a former Deputy Governor RBI, have been advocating this.

Export growth as well as ‘Make in India’ need this. The possible concern about this fuelling inflation is misplaced as inflation is at a historic low. The impact on the fiscal deficit would be marginal as government has stopped subsidising petroleum products.

But as the government goes in for sovereign borrowings, then it too, like large corporates, wealthy Indians and FIIs would see financial gain from an appreciating real exchange rate and may, therefore, favour it even though such appreciation hurts the economy and job creation.

Sluggish private investments

Private investment has not been rising for many years now. Not only should it rise rapidly, it should also lead to the creation of more jobs. It should facilitate the doubling of farmers’ incomes. A surge in private investment in States such as UP and Bihar, which are holding India back, is sorely needed.

But private investment decisions are taken by a hard headed assessment of likely profits and risks. Considerations of national interest, or, exhortations from government, do not really matter. The expectation of returns from specific sectoral investments has to be high enough. Understanding the business case for new investment in any sector and of possible policy instruments which can be used to improve it, needs in-depth analysis of that sector.

There has been some reluctance to look at sectoral interventions, given the experience of the pre reform period of a planned economy with micro management and the maze of distortions it created. This reluctance was strengthened by the consensus in the Anglo Saxon world against ‘industrial policy’ as the state was seen as not being capable of choosing ‘winners and losers’.

Notwithstanding this, the state has in the industrialised advanced economies continued to selectively intervene to create and also maintain competitive advantage. The most remarkable success has been the European effort to create a competitor to Boeing in Airbus. The main reason that ‘Make in India’ did not get beyond being an attractive aspiration was that the need for a holistic medium-term strategy for the identified sectors was not sufficiently recognised.

Nor, as a result, were effective sectoral policy instruments crafted in partnership with industry. The recent call of CII for a sectoral focus flows from this weakness.

Focus on construction

Exploring briefly a major sector would be illustrative of the possibilities. One major labour intensive sector is construction. Housing and real estate have been one of the key drivers of economic growth in many economies over time, including India in the post reform period. It drives upstream demand for industries like cement, steel and electrical equipment.

Whenever it has run into difficulty on account of, say, an asset price bubble which sees sudden correction, it has contributed to significant economic downturns. This sector has been in difficulty in India in this decade. Recently many housing NBFCs have got into serious problems. Earlier, many builders were under stress and some turned bankrupt. Many who had booked apartments found that their projects were not getting completed and their money was stuck. Some had to go to the courts to get some sympathetic attention.

Sectoral policy attention at an early stage could, perhaps, have minimised distress. An early revival of the sector would have also helped in job creation and in nudging GDP growth upwards.

In the days of heady growth, builders moved aggressively to increase their land banks and launch new projects. Once demand moderated, they found themselves over leveraged. Land banks are illiquid assets. With new bookings drying up, many found it increasingly difficult to complete ongoing projects.

Unlike sectors where firms face decline due to obsolescence of the technology and the product, such as CDs or conventional mobile phones, where nothing can be done, housing is a sector with enough demand in India for the next 50 years at least. Though the land bank with the builders could not be monetised, its long-term value would not only be intact but would keep increasing.

There was, therefore, an arguable case for public financial institutions at the behest of government taking a long-term view of the sector and coming to its rescue. Conversion of short-term debt into long-term finance or equity, along with infusion of credit for completion of stalled projects, could have been a solution. The land banks would have mitigated risk.

In some egregious cases, ejecting the promoters and creating Board managed companies with the financial institutions in control would have been necessary. Nudging the sector to lower the price points of their new project offerings could have generated sufficient demand for the sector’s revival.

But these steps require a different mindset, which accepts situations where it is in the public interest to intervene early to minimise public losses.

Restoring the financial sector to good health may alone not be sufficient for creating the virtuous cycle of rising investments, exports and growth. Creative sectoral policy interventions could be decisive in turning hopes into reality.

The writer is Distinguished Fellow, TERI, and former Secretary, DIPP

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