The distinct turnaround in the manufacturing sector is the road to glory in the mid-term appraisal of the Eleventh Plan. The average monthly manufacturing growth rate of 10.4% from July to November is the success of the stimulus and must be sustained. The IIP grew by 9.4% for the six months from June to November. That it comes on the head of almost two decades of low growth must be used to put paid to the facile argument that India can grow only on the basis of services and the commodity producing sectors of agriculture, with industry in the back seat.
In fact, it is the manufacturing sector that gives China its edge on Indian growth. That growth took place in the stimulus reaction to a global recession is both a policy success and a lesson. It is true that the base is low but India is one of the few countries in the world where this has happened and that needs a pat on the back.
Interestingly, as this column has shown, the recent survey of (09/10) Central government finance shows that public capital formation has gone up after falling drastically in 07/09. The finance minister needs credit for this. The lesson is to sustain it. Government capital formation must be sustained to crowd in private, particularly, corporate investment. This will need restraint on government consumption. Second, the same RBI survey shows that the Central government?s loans have not picked up. Most of the PPP arrangements essential to crowd in private investment need attractive long-term loan finance as sweeteners, and this is not happening.
There are huge blocks in India on this aspect. To begin with, loan finance is largely from public sector financing agencies; foreign sources are still subject to restrictions. As the Ratan Tata Commission implied, sectoral caps on investment and loan finance can cripple any ambitious investment revival.
I remember as power minister convincing the then finance minister that while I understood a public sector bank?s prudence requirements in not exceeding a particular sector?s exposure in its portfolio, in this case power, even one power project could easily exceed that cap given the thin nature of India?s long-term capital markets. The kind of investments in infrastructure, which are a part of the American and Chinese stimulus, will simply not be possible with such restrictions. US long-term capital markets have depth in them even after the meltdown and Chinese public agencies couldn?t be following these restrictions. If you control release of local energies, allow foreign exposure without blocks. If you don?t do either, infrastructure investment will never go much beyond the present 5% of GDP and the doubling of the ratio would remain on paper.
China?s edge on India is in infrastructure and not as we fondly believe in tariff protection or hidden pricing strategies. That may be a part of the story for some sectors, but the cost of energy and transport infrastructure that is in most cases half of the Indian levels gives them a decisive competitive edge.
We are doing little to support the expansion of Indian firms on a global plane. Public sector firms crow about their trivial foreign exposures. Large Indian corporate firms are still not given any assistance. There is, in fact, little understanding of this phenomenon. A recent Brookings-NBER study pointed out that the ownership structure of Indian industry has not changed much. This is reported to have led to discomfort among some in India. In my research institute, young scholars working on the global exposure of Indian firms are quoted abroad, but rarely at home. Meanwhile, foreign scholars working on Indian firms in their country come to us for collaborative arrangements and we see that they get great exposure in their home country. The Brookings-NBER study, in fact, should be seen as confirmation of the fact that large Indian companies built up their reserves of finance and skills in the earlier epochs and are now straddling the world, since these are convertible in world currencies and commercial playgrounds. This is a source of strength to sustain rather than something to brush under the carpet.
Policymaking has to take a call on technology policy and policy for the small-scale sector, particularly financing and market support. The road map has been given by the Krishnamurthy panel and needs quick decisions. Since we have been saying this all along, it must now be done in weeks rather than months. The manufacturing sector can most certainly play a leading and real role in the pursuit of 9% growth.
The author is a former Union minister