The key to growth is investment. In the early years after Independence, there was the unarticulated premise that the government alone could garner the resources to make the huge investments that were required to stimulate growth. Nevertheless, the government did not discourage private investments. Thus the concept of a mixed economy emerged and both the public and private investments were allowed to co-exist. The best examples were steel and motor transport.
It was only later that the notion public sector can do turned into public sector alone can do. What was necessary to achieve an end became an end itself. Consequently, all the new steel-making capacity was reserved for the public sector. Consequently, the states nationalised bus services. The Central government had even set up a factory (near Chennai) to make wigs out of human hair tonsured at nearby Tirupati!
Private enterprise cannot be quelled so easily. While large segments of the organised industry were closed to private investments, there were still other areas in which the private sector could invest and prosper. Notable among them were real estate, plantations, textiles, wholesale trade and services.
When more sections of the industry were closed (mining, banking, insurance), the more enterprising took their money abroad. Human capital also left the country. Indian private investment (money and human resources) flourished in other parts of the world.
Since 1991, we are engaged in wooing capital. The government is also committed to encourage Indian investors to invest in the country. There is, supposedly, fierce competition among the states to attract private investments. In the case of many states, private investments have become a dire necessity because the states have no money to invest. But despite all the drums and trumpets, we have achieved only limited success in attracting new investments, especially in large greenfield ventures. Compared to China, our record in this behalf is pretty dismal.
Over the years, cobwebs have accumulated in our minds. While, undoubtedly, we have cleared some, I am afraid a lot still remains. For example, Mr Rahul Bajaj (and what survives of the Bombay Club) maintains that money has colour. According to him, there is foreign money and there is Indian money, and the latter has to be preferred to the former. Another example is the belief that foreign institutional investment is hot money and it must be regarded with suspicion. Yet another example is the widely-held belief that (as the book Saving Capitalism from the Capitalists puts it) financial markets are simply tools for the rich to get richer at the expense of the general public.
The fact is that we do not attract large quantities of foreign investments, not because there is not enough money in the world, but because of our ambivalent attitude to foreign investments. There is a lot of money jostling around the world estimates vary between $250-400 billion every year. The other fact is that there is enough Indian money too, but it shies away from new investments because of the political and regulatory environment. Indian business, according to reports, is sitting on piles of cash. Our banks have huge lendable resources but few borrowers, and so they invest in government securities. Our retail investors will lap up an offer from Maruti it is oversubscribed several times but such offers are few and far between.
The political environment is quite hostile to new investments. Regulators have only made it worse. In many cases, regulators act as the extended arm of the government. If some spirit is still left, the taxman effectively kills it. The examples that I give below are real-life examples, and since some of them are involved in litigation I shall refrain from making any comment:
* Nearly half-a-dozen power projects have withdrawn from Madhya Pradesh, thanks to a misconceived letter from the Centre. Worse, the state has refused to return the money taken as security deposit pleading lack of resources!
* A power project in Karnataka is waiting for nearly three years to receive from the state a system to ensure payments (payment security mechanism) that will be acceptable to the lenders.
* Private sector power projects in Tamil Nadu are in a perpetual stop-go mode depending on whether they receive payments or not for the energy supplied
* In West Bengal, the government and the regulator are on a collision course, and the courts have had to step in more than once to interpret the provisions of the electricity laws.
* In Andhra Pradesh, the public sector transmission company is perhaps the biggest litigant and has its hands full with cases pending before the regulator, the high court and the Supreme Court.
* The unbundling of the electricity sector that was pioneered in Orissa lies in a shambles with one investor offering to sell its entire equity stake for nothing.
* Enron remains the most debated case of a foreign investment gone sour and the most celebrated litigation that has yet to see its conclusion.
These are examples drawn from the power sector alone. There are similar examples in the telecommunication, pharmaceutical, port and other sectors.
Opportunity knocks on our door. We are afraid to open the door wide enough for it to enter. Even as Mr NK Singh begins his labour, Mr Arun Jaitley will have to grapple with the draft agreement on multilateral investments an agreement to lay down binding rules to govern foreign investments in the member-countries of WTO. Before we go global, we should put our house in order. If Mr Singh succeeds in bringing some sense into the power sector, that exercise must be repeated in other critical sectors of the economy.
(The author is a former Union finance minister)