Many things are going right this Diwali. Infrastructure numbers just out for September show steel, cement and refinery output all racing ahead at well over 7 per cent; even electricity generation and coal output show improvement. So industrial revival continues into its 15th month and there is little reason to believe that anything will disrupt the expanding trend this fiscal year. Unincorporated business and smaller companies not captured by investment data of the national accounts and lumped with households? physical savings have been showing signs of growth for a couple of years now.
Corporates are also beginning to look at accelerated brown-field expansions to augment the acquisition of revenue earning assets, capital-wise cheapest form of expansion. Corporate India seems to have shed its fear of being outclassed by the Chinese and other Asian super-manufacturers and has, in an amazingly short span of just a few years, begun to view integration into the Asian region as an opportunity for growth, not a recipe for ruination.
Prime Minister Vajpayee?s recently announced initiatives of opening up to South-east Asia, to China and possibly to other economies of the Far East is a far-reaching strategic shift in policy. It accurately reflects the new-found confidence of Indian business and the self-evident, if insufficiently appreciated, fact that this is the fastest growing region of the world, now for years and decades to come.
Tuning in a fast-growing economy to the only part of the world that is likely to grow at a sustained pace of 6 per cent plus in decades to come is obviously highly advantageous to all concerned. Borrowing the hackneyed phrase, a rising tide lifts all boats. And the initiative, if it is not wrecked by short-sighted apparatchiks and the few business people who only understand the art of living off rent, can be as much of a defining moment as when the Narasimha Rao-Manmohan Singh team shattered the walls of our self-built prison in 1991.
But this is not an unalloyed good story. Our government finances and public service provision remain in poor shape. As the economy grows, the demands on public service provision are going to increase, not decline. The saving grace is that Indians, unlike their counterparts in Europe, have limited expectations from government. But there are many ordinary things that if government does not provide, they will not be provided by any ? schools, public health, drinking water, rural roads and of course civil order.
Indians as citizens have not lost faith in their government. This is attested to not only by their participation in the electoral process and their interest in the politics of the day, but also by the fact that they continue to entrust their savings with government. Small savings rose by 27 per cent, while bank deposits increased 12 per cent. Sure, interest rates had something to do with it but remember that bankrupt outfits, of which there are several around, would not be able to raise a rupee whatever the rate of interest they offered.
The first thing government can do is to cure the problem with entities within the system that are in default. Recently it was reported that the Reserve Bank of India (RBI) would make public, details of state government agencies that have defaulted on their obligations. In many cases it is known that those who defaulted were in a better financial position than those who did not. The inspiration behind the cavalier attitude to debt obligations stemmed from the idea that, by defaulting, one can force the bond holder to agree to ?restructure? the obligation for a longer tenor and lower interest rate. It is the way of the highwayman, and no debtor except for those who shelter under the majesty of government can ever dare tread this path.
It is not possible to fix all that ails in governmental finances overnight, but this Diwali, the powers that be can surely resolve to out the defaulters. If the entity in question does not wish to pay up, it must enter into liquidation. Or if government feels it has an obligation to rescue, it must pay off all debtors, not just foreigners, but Indians (and their banks and provident funds) too.
The author is economic advisor to ICRA (Investment Information and Credit Rating Agency)