The great investment commission drama

Written by S Narayan | Updated: Dec 22 2004, 05:30am hrs
The commissions are all in place and the task of finding out what is wrong and how to do it better has almost begun. The commission on public enterprises will carefully examine the future of profit-making as well as loss-making public enterprises. The competitiveness commission will examine approaches to making Indian industry more competitive. And the investment commission would find means of enticing entrepreneurs from overseas into investing in India. The need for this exercise is self-evident. It is important that the future of public sector enterprises be decided transparently, after due analysis and in a manner that future speculation is put to rest. Competitiveness of Indian industry, and, in particular, those that can offer employment opportunities like textiles, gems and jewellery, handicrafts, is vital at this stage of our economic development.

Its the investment commission that causes a pause in this flow of logic. In identifying people of public eminence to man the commission, the government has given a clear signal as to its seriousness of purpose. The commission is expected to interact with potential investors, market the advantages of India as a destination, facilitate the processes, and, in, short, hand-hold these budding investments to fruition.

The commission has its task cut out. First, its a tired and well worn path that the commission will have to tread, following on the footsteps of the Indian Investment Centres of the 60s, the secretariat for industrial approvals of the 70s, and the foreign investment promotion board of the 90s. Its interesting that, it was in the early 90s, during the first phase of reforms, the investment centres functioning overseas were wound up. The shadow battle between external affairs on the one side and commerce and economic affairs on the other, ended with the closure of the India Investment Centre offices. It was argued then that these offices served little purpose, that an open and transparent investment environment was an incentive in itself, that reforms would ensure the flow of investment. Those that spearheaded these views seem to think differently now.

The commission is expected to hand-hold budding investments to fruition
Fundamental to this exercise is examining why investments are not happening
But the commission has very little in its armoury to meet this objective
Perhaps it is because, notwithstanding the fact that, forex reser-ves are at an all-time high, there is concern that in-vestors like India only in the short-term, and not enough to stay the course. Theres an apprehension that these reserves, made significantly of financial market investments, cannot be used by the economy for any long-term investment like infrastructure, for that would be using short-term money for long-term, a risk no prudent financier should take.

Further, theres also the worry that employment creation in manufacturing requires much greater investment than is happening, and that the pattern of investment by Indian industry doesnt lead to confidence that such investment will take place. Those that have studied recent credit offtake figures would have discovered that the largest increases are in short-term consumption credit, not in agricultural credit or in project lending. Employment generation in industry continues to be a question. And so the trawler has to put out to sea to find, catch and bring in shoals of fish, big and small, which will invest here.

Fundamental to this exercise is the examination of why investments are not happening. The first is that most of the approvals for land, power, water, infrastructure and construction are with state governments. There is no mechanism at the central level to even monitor or coordinate with state governments on the provision of these for industry. Mining leases, land acquisition and state level approvals take unconscionably long, and its not clear how the investment commission can help.

Second, financing institutions no longer have the core expertise to assess, evaluate and decide on technologically complex projects, and the decision-making process depends largely on the face of the borrower. In the US, there are specialist groups that work on project assessment. These teams draw on subject experts, where needed, and make an impartial assessment of credit risks and credit needs. Financial institutions (FIs) use these organisations to judge viability of projects. Turf consciousness of our FIs will not allow such expertise to develop.

Third, there is the issue of getting out. Investments fail, markets and products change and managements are not all the same. Getting out takes nearly 10 years in India. Labour laws and state regulations seem to be insurmountable obstacles for these investors. And there is no consensus on any amendments to the existing laws.

Finally, investors constantly worry about continuity of policy. Will insurance be 26% or 49% What will be the stake allowed in private banks, in retail, in airports and so on, and most importantly, when will this happen is the question that most investors would like a clear reply to.

Its difficult to imagine that the government or the members arent aware of these obstacles. It is also inconceivable that they dont appreciate that the investment that is taking place, in knowledge-based industry, in the services sector, in pharmaceuticals, chemicals, automobile ancillaries and in textiles is continuing to happen in spite of these obstacles. The commission thus has very little in its armoury.

The reasons must lie elsewhere. Could it be that existing players could use it a ruse to prevent entry of others Certainly, the outcry by the Indian pharma industry and oil industry is against competition. The investment commission offers a time window for people to wait while others more entrenched, move ahead. Or perhaps, it is a red herring to draw attention away from the more intractable problems of policy, which may be difficult to resolve. As Myrdal pointed out in the Asian Drama several decades ago, when action is not possible, activity replaces action. Perhaps that is what we are witnessing now.

The author is a former finance secretary and economic advisor to the PM