The real lesson that we need to have learned from the high growth phase is that there has to be a balance between corporate-led growth processes and small industry-driven progression and, perhaps by chance, we hit upon the right combination during the 2003-08 period.
First, as far as infrastructure development is concerned, there was a lot of involvement of the private sector: in highway construction, in airport privatisation, in port development and in power generation. Alongside, we also had the big push on rural roads through the Gram Sadak Yojana scheme, which created a dynamic of its own.
We really cannot, and should not, be looking at political economy under the assumption that there is only one kind of India, which is corporate.
Second, and more importantly, what really drove the system was entrepreneurship. If one looks at the growth of the corporate sector during the high- growth period, it was the entrepreneur-driven companies which did very well. We still do not do enough to let entrepreneurship flourish. There are all kinds of governance issues which are of critical importance, especially for entrepreneur-driven start-ups.
In the current phase, I am not very sure whether we have fully come to grips with the problem of persistent inflation.
Food inflation has been upwards of 8% since 2005, but we still had a top-line inflation rate of 4.5-5% over the same period simply because non-food inflation kept at 3% or below. In a sense that’s the new normal you should be looking at.
India has also been a recipient of a lot of negative commentary from credit rating agencies. Importantly, the phraseology is strikingly similar to what was being said about India in the mid-1980s and 1990s. The same song has been sung for 30 years, yet these have not prevented investors from coming in. The only money that flowed out of India was portfolio money, and, in fact, the portfolio investors are back again and it does not make any difference to them what the rating agencies have been saying. Instead, we should focus more about why Indian companies aren’t investing enough.
At the same, I am not sure a country can run at a current account deficit (CAD) of more than 4% of GDP for three years and expect the currency to remain stable. There is nothing called a normal level for the rupee as much depends not just on inflation, but also on relative growth rates among major economies of the world. When India was growing at 8.5%, and the world at 3%, the rupee was bound to appreciate. I would imagine looking at the span of next three to five years one should be looking at the rupee somewhere near 60 to the dollar.
That said, in my view, the current phase of slowdown is behind us. There are signs that corporate investment has started to come back. We need to make sure that non-corporate investments continue while corporate investments start picking up.
We also need to keep in mind the fact that once corporate investment fully picks up banks are going to shift the focus of their lending towards the corporate sector. Increasing public savings is the only way to manage this so that small and medium enterprises do not get squeezed for liquidity.
What we should also be worrying about is that a huge amount of global liquidity is simply lying stashed away in banks. Developing countries should prepare for dealing with inflationary pressures after these funds start getting deployed.
Control over subsidies is one of most important policy reforms that we need to undertake. It may contribute to inflation but that’s the price that we have to pay as there are not very many other options. If subsidies are politically more difficult than cutting back on major schemes (as happened last year when plan spending was slashed by 30%) is politically more acceptable then we have to live with it.
Another important area that needs immediate attention is tax reforms, especially GST. If we look at the experience we had with value-added tax (VAT), the states have been the biggest beneficiaries.
The entire debate on reforms has got stuck on incremental points such as allowing more foreign direct investment in certain sectors and similar issues. In my view, there is, in terms of real reforms, very little left in the hands of the Central government. There is, however, a lot to do for at the level of the states and, increasingly, at the level of local bodies. Unfortunately, these policy imperatives do not find too much mind-space in mainstream public discourse, because, dare I say, these are not glamorous.
Pronab Sen is chairman, National Statistical Commission