As the European and US economies have continued to struggle, sharp differences of opinion have been expressed about the way forward. Of course, the debates about whether market democracies or authoritarian left regimes are better equipped to take difficult economic decisions were definitively over after the break-up of the Soviet Union. However, the assumption that laissez-faire markets have all the answers, implicit in Ronald Reagan’s remark that “government is the problem”, is being re-examined. Clearly, the rise of China, although the country has a long way to go to prove itself in per capita terms, is on everyone’s mind.
Francis Fukuyama, author of the 1992 book The End of History and the Last Man, is now wondering whether the US has strayed too far to the right. He suggests in an article in the Financial Times dated July 21-22, 2012 that “conservatives [in the US] must fall back in love with the state”. Mr Fukuyama observes in this article that “in the wake of the financial crisis and the rise of massive inequality [in the US], there should be an upsurge of left-wing populism”. According to him, this has not happened because the left is seen as trotting out the same old tired ideas of the past that led to fiscal stress and low growth.
The economic slowdown in India and weaker prospects compared to the higher levels of GDP growth achieved in the last five years have resulted in breast-beating and introspection. In India, the central and state governments administer a range of subsidies through elaborately contrived schemes including for fuel, power, fertilisers and foodgrain. Economic decisions in India are often driven by competitive populism, and so it would be inaccurate to call our inefficiently targeted subsidies and hesitation about foreign direct investment (FDI) in various sectors “left-leaning”.
In this environment, India struck a stridently pro-reform note on September 14, 2012 by permitting up to 51 per cent FDI in multi-brand retail and 49 per cent in domestic airlines, raising the price of diesel and so on. We need to get other prices right and take incremental steps to relax FDI caps and open up new sectors to foreign investment. Since consensus remains elusive in India, this article proposes that even as we try to move forward on policy reforms, we should highlight the implementation of specific projects.
Turning back to the global level, the focus remains on central banks to promote growth in Europe and the US. For instance, on September 6, 2012, the European Central Bank announced that it would buy euro-denominated government securities to keep interest rates affordable for debt-stressed euro zone governments. And on September 13, 2012, the US Federal Reserve announced that it would embark on a third round of quantitative easing (QE) and would buy $40 billion of mortgage and other securities per month, with no specific cap on how much in total.
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To date, the G20 has had little success in limiting current account imbalances except to raise awareness about the dangers of potential protectionism. As demand remains flat to negative in the West, China would need to increase consumption — which implies higher domestic wage levels. The resulting decline in China’s competitiveness would lead to opportunities for developing countries with reliable infrastructure to step into the breach and raise their manufacturing output. India, with just 16 per cent of its GDP coming from manufacturing and considering high levels of underemployment, would benefit by taking the initiative to pick up some of the slack.
The obvious difficulty is India’s many shortcomings in infrastructure. It follows that we should not be too distracted by the polemics of policy issues. For example, at this stage of development of our financial sector, it is a waste of time and energy to debate whether stock exchanges should be listed and private firms allowed to sponsor banks. The ownership and governance of market infrastructure institutions (MIIs) such as stock exchanges, depositories and clearing corporations were under review last year, and the talk about the benefits of listing stock exchanges is just that — unsubstantiated talk. Similarly, it is a distraction to consider the “Entry of New Banks in the Private Sector”. It would be more productive for the Reserve Bank of India to confer with public sector banks on how not to be pressured into ever-greening problem loans by making such consultations more transparent.
Specifically, it would be useful towards improving infrastructure if, say, 10 nationally significant projects were targeted at the central government level by the line ministries concerned. These could be projects currently under implementation — for example, the Mumbai-Delhi and Chennai-Bangalore industrial corridors, two ultra-mega power projects that are not progressing as envisaged, and crucial segments of the golden quadrilateral roads that are to be upgraded to four to six lanes.
It is likely that these projects would be completed faster if we work backwards from what is needed to identify bottlenecks, and among the foremost are land acquisition and disputes with contractors. We need to empower managers and set up oversight working groups including members from the central and state governments. An overwhelming focus on timely completion should enhance access to long-term capital from domestic and foreign sources.
As a concluding thought, although much has been made of public-private partnerships for infrastructure projects, government officials are mostly responsible for execution. It would help if the project execution special purpose vehicles (SPVs) were manned by public and private sector talent. That is, if the CEO of the SPV is from the public sector, the chairman could be from a private firm, and vice versa.
The author is India’s High Commissioner to the United Kingdom.
These views are personal.
j.bhagwati@gmail.com