Japanese firms should take the responsibility of raising funds and completing projects

Shinzo Abe returned to power in Japan in December last year on his promise of pulling the country out of the economic morass it had slipped into. Fundamental to his approach of effecting the same is the monetary expansion on a scale that would put big money in the hands of the general public and businesses. Simultaneously, the incentive to invest is intended to come from attaining economic buoyancy marked by a 3.5% annual GDP increase and inflation of 2%, as opposed to persisting deflation and growth of about 1%.

Striving to succeed primarily through aggressive monetary easing, the two-time PM?s approach has earned the sobriquet of Abenomics. Proving conventional wisdom wrong is not going to be easy. Several structural issues must be attended alongside quantitative easing, with the two most important being making the Japanese economy, both agrarian and industrial, more competitive, and gainfully deploying the vast and growing number of older citizens. Quickly becoming cognisant of that, the new government has added dimensions of fiscal flexibility cum consolidation and has been promoting industrial competitiveness to make the endeavour more wholesome.

With the new Bank of Japan Governor Haruhiko Kuroda sharing Abe?s perception, that hitherto BOJ was too timid in pumping money, and committing himself to a ?regime change?, markets have already started moving?the yen has weakened, stocks are boosting and the yields on benchmark 10-year bonds have fallen to near lowest in a decade. Though these portend well for growing Japan?s corporate investments, there are clear limitations to the extent domestic consumption and developments can support economic revival. Given its high integration into the world economy, Japan has to necessarily look outwards for growth.

Not surprisingly, the East and South Asian capital markets have favourably reacted to expectations of more capital inflows from Japan. Since the return of Abe, two countries?the Philippines and Indonesia?have witnessed a sharp rise in their equity markets, particularly in real estate and general retailing. Strong quarterly results of such domestic-demand-driven companies are attracting the interest of Japanese and American investors, who incidentally are optimistic about investing in Mexico as well. It appears that such populous nations with relatively stable and growing economies and the US, which is on a recovery path, would see most of the market-driven capital flows being unleashed by monetary relaxation in Japan, the US and Europe.

All BRICS countries, including the new entrant South Africa, on the other hand, given their variety of challenges, are unlikely candidates of such flows. Investors seem disappointed with their current performance and their scripts do not generate the same kind of excitement as in the heady days before the onset of the global crisis. In Brazil, sluggish growth due to falling investment, accelerating inflation and strong interventionist policies like the crackdown on capital flows have dimmed investor sentiment besides bringing down GDP growth to 0.9%. In Russia, the returns on bonds are negative and GDP current growth near zero. Like in India, its central bank has been targeting inflation more than growth and has not loosened monetary policy. China, after years of double-digit growth, is slowing down and a host of reform measures are needed to restore confidence. Frequent wildcat strikes in mining, huge eurozone exposure and political infighting throughout the last fiscal cost South Africa heavily.

With GDP growth in the third quarter falling to its lowest level in three years, the current account deficit almost doubling in two years, and poor bottom lines characterising most corporate results, India too is not likely to see much of the easy money. While we take measures to urgently repair our economy, some on-the-feet thinking and quick action is required to attract a slice of that money, especially from Japan, with which we have now developed close ties. In keeping with the past tempo and greater availability of funds to lend, more project aid by way of loans may become available to India, as happened recently when Japan committed about $3 billion to four infrastructure schemes. Welcome as it might be, it is not a sustainable way to develop many of the capital-intensive transportation and energy projects we have long been talking about. Also, this way we do not necessarily benefit from the project implementation and management capabilities that the Japanese are known for.

The size and growth potential of the Indian market is inducement enough for most global infrastructure developers. The impediments to enter and setting up businesses after navigating a maze of rules and regulations we have tied ourselves in, and securing land deter foreign investors, particularly the generally law-abiding Japanese. The recessionary global economic scenario of recent years had exacerbated their difficulties. If there is any likelihood now of the resource-crunch issue being addressed through the Abe plan for the Japanese corporates, and the Indian state takes upon itself to handle the other constraints of the kind talked above, the mode and pace of infrastructure development in India can be radically changed. Rather than borrowing money themselves, the various infra ministries and their numerous agencies should become the active espousers of these companies and their Indian partners, if any. Thereby, the project risk and servicing capital will be entirely transferred to overseas developers, something like what NHAI was mandated to do for national highway development but has failed to do effectively. This can certainly be attempted for a few of the large projects in which both the Japanese government and their businesses have the capabilities and have been expressing interest in getting involved.

Among the leading options for this mode of development through Japanese participation are the high-speed rail link between Ahmedabad and Mumbai; a dedicated freight corridor with or without a bullet train between Chennai and Bangalore; a hub port each on the eastern and western coast so that large-sized ships can come directly to India without transhipment at Colombo or Dubai, complete with coal and LNG handling facilities; and at least two ultra mega power generation projects in the beleaguered DMIC along with their smart transmission and distribution systems. While awarding the concessions for these projects, the relevant government authorities must not be too prescriptive and considerable leeway should be given to the developers to select the locations, technologies and fuel, etc, for the power projects. The respective sector regulator would take care of the tariff payable by the consumer. The government, after determining the duration of the concession on a BOT or BOO basis, must live up to its commitment of securing the timely statutory and other approvals, make available the requisite land, water, etc, and be ready to cover the political risk. All other responsibilities including raising finances, completing and operating the project as per the concession agreement would squarely be the developer?s risk and responsibility. This is what PM Manmohan Singh should be proposing to Abe when he meets him by May-end in Tokyo for his annual parleys. More about each specific project and their structuring later on.

Ajay Dua, a former secretary in the ministry of commerce and industry, has, for several years, worked closely with the Japanese government and businesses