Building bridges

So is it the best of times or the worst of times? Perhaps both. There is clearly an India which is experiencing turbo-charged growth. But there is also an India in which 35% of the population is illiterate, writes M&M vice-chairman Anand Mahindra.

'It was the best of times, it was the worst of times; it was the age of wisdom, it was the age of foolishness...' It is my suspicion that the drivers of Dalal Street have been revisiting the Charles Dickens classic, A Tale of Two Cities, and have taken the ambivalence of those opening lines too much to heart.

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The roller-coaster movement of market indices underscores the bewilderment of players and their diffidence in visualising a coherent economic policy roadmap. Hence, though neither the fundamentals of the Indian economy nor the discounted cash flow of India Inc have changed in a matter of months, the market has been testing new lows.

So is it the best of times or the worst of times? Perhaps both. There is clearly an India which is experiencing turbo-charged growth. But there is also an India in which 35 per cent of the population is illiterate and 20 per cent of children receive no education. This India faces a looming water crisis: three-fourths of the population will get less than 1,000 cubic metres of water per person per year in the near future. This India has the world’s most outdated infrastructure. This India talks of quality in its board rooms but does not follow through in reality.

Clearly, the task of any new government must be to bring these two sections together. It must be a priority to ensure that 65 per cent of the population begin to buy into the liberalisation and reform process. The first phase of reforms brought benefits to the urban middle- and entrepreneurial-classes. Conventional economic theory speaks of benefits reaching the less privileged parts through a ‘trickle down’ process. But in India, the vast majority of the population is less privileged and cannot afford to wait long.

However, even as the locus of developmental efforts shifts, there is no reason to slacken the pace of reforms that have benefited the urban classes. No one, not even the Left, will deny that raised consumption levels in one part of society create major employment opportunities for all, especially the less privileged.

A major achievement of reforms so far has been to phenomenally increase the size of the consuming classes. The steroidal growth rates in GDP that we witnessed in the last year were derived primarily from consumption-led growth and not investment-led growth. It is imperative to intensify this phenomenon to keep us on the radar screen of the world’s investors.

What do we have to do to continue to spur consumption? One legacy that the new government can leave behind is the implementation of the value-added tax (VAT) system. It should not succumb to pressures from the trading community to hijack VAT’s implementation. There are many economic virtues to a VAT system but the most graphic one is that although we claim to have a large domestic market, the multiplicity of tax rates and systems in each state and the complexity of transferring goods between them go against our advantage. The absence of a VAT system, in essence, carves up our potentially lucrative market into a series of regional markets by rendering it difficult for national players to distribute their products efficiently across the country.

The second and equally important virtue of VAT, particularly for this government which is under pressure to increase public spending, is the potential of raising revenues substantially since tax evasion would become a virtual impossibility. If the finance minister can accomplish this task, I would happily forego many other requests that industry would have of him. However, in the pursuit of raising the size and scale of consumption, I would also urge that Chidambaram complete the journey of tax reduction that he personally began years ago and implement the majority of the recommendations of the Kelkar Committee — the two most important among them being the equation of the corporate tax with the marginal personal tax rate and the withdrawal of taxes on dividend distribution.

Finally, in order to make a step-change in the scale of production and consumption of our economy, we have to make a mission out of modernising and investing in our infrastructure. The Chinese now do not view us as a success story only in information technology but also look enviously at our growing competitiveness in certain sectors of manufacturing, such as auto components. It is also obvious that we are able to compete only in areas of low volume manufacturing where our engineering strengths are a key input into the overall manufacturing costs. Yet, there is absolutely no reason why India cannot become a champion of high volume, low margin production of goods and challenge China. The missing link is modern infrastructure that facilitates the efficient inward and outward movement of goods to support high volume production.

Large-scale infrastructure projects also enable employment-oriented growth and create a surge in rural employment which begins to provide a burst of prosperity.

The two most relevant areas of investment for the rural population are roads and irrigation. There is a reason for putting rural roads before irrigation. Empirical economic evidence suggests that for every rupee invested in rural roads, there is a multiplier effect in terms of rural wealth. Given the population that lives in villages, affluence comes not simply by improving agricultural output but by improving the variety of employment opportunities within rural areas. Rural roads enable rural clusters which, in turn, provide ancillary means of livelihood.

Coming to irrigation, during 1980-2000, public investment in agriculture has fallen from 44 per cent of the total to about 23 per cent with its negative impact primarily falling on new irrigation projects. It is impossible to envision another green revolution without harnessing the power of irrigation. But irrigation conjures up the image of water only in terms of its use in enhancing agriculture. It’s more urgent right now to begin a national water conservation movement if we are not to experience a social crisis of a magnitude that we can scarcely imagine.

There is no shortage of technology today to enable us to benefit from the bounty of the monsoon. There are proven mechanisms of rainwater harvesting and proven social models which panchayats, villages, small towns and even large cities can base their efforts on. What is needed is political will and the zeal to thrust this to the very top of our national agenda.

While on the subject of boosting rural affluence, I can only take up the refrain that we have been voicing at CII for many years now that agricultural reforms cannot be ignored any more. A plethora of things need to be done to remove the inefficiencies caused in the food chain by multiple intermediaries and outdated regulations. The current APMC Act prohibits transactions outside the mandi system. This essentially is equivalent to a tax on farmers because a number of players — public, private and foreign — that may enter the market for Indian agricultural produce are prevented from playing in this field.

Directly linked to this is the need for creating a unified food law. The 2002 budget had announced the creation of a group of ministers to set up a new integrated food law but this has not happened as yet.

Finally, rural housing is an obvious thrust area. The problem often cited is the lack of adequate property titles in rural areas and, therefore, the lack of collateral. But it is also well-known to those intrepid private sector companies that have dared to venture into rural finance that lending to rural folk is, by and large, a good investment since they very rarely renege on the loans.

A cascade of affluence all through would result in a tangible and meaningful confluence of economic prosperity. If this can be made to happen, then we can certainly say that the country will be in for ‘the best of times’.

The writer is vice-chairman and managing director, Mahindra & Mahindra