T N Ninan: Who has the cash?

WEEKEND RUMINATIONS

The lively debate on investment""who should do it, in which sectors, and how""has focused on key policy choices. Should it be in the Indian or foreign sector? And then, public or private?

Those who might be called reformers would prefer a greater role for the private sector, both domestic and foreign. The Left, now the swing player for the UPA government, would want a "strong public sector" and indeed primacy for it where possible.

This debate on rival approaches would benefit if it is grounded in hard facts. Investment is a question of cash; the question must therefore be, who has the cash to invest?

If it is the public sector, then it can go ahead and invest as much as it wants. And if national savings are not enough for getting the growth rates that we want, then foreign investment must come in. We may have our preferences, but at the end of the day growth happens when investment happens.

Framed in this way, the facts are that the public sector accounted for as much as 20 per cent of the total savings generated in the economy half a century ago, when the public sector thrust began. That figure remained more or less steady till 1980, when it was still above 18 per cent of the total.

Then began the great decline: to 5 per cent in 1990, and now to minus 10 per cent. So, if there is virtually no public sector investment taking place today, it is because the public sector has no savings, and therefore no money to invest""except what it can borrow. And most governments are already so indebted that their ability to borrow more is constrained.

In sharp contrast, the contribution to national savings by the private corporate sector has gone up from 10 per cent of the total to about 16 per cent""close to the level of public savings before 1980. So the private corporate sector is ready and able to play a larger role. The bulk of savings of course continues to be accounted for by the household sector.

As long as the public sector remains as impecunious as it is now, it simply cannot take the leadership role in any capital-intensive sector. Indira Gandhi probably saw the problem coming when she nationalised the largest banks; indeed it was argued then that, after nationalisation, the country could even get by without any income tax because the government would have so much of bank money to spend!

Such crazy notions have long been forgotten (bank money belongs to depositors, not the government), but the question remains: if we want an increase in the public sector's role, where is the money?

One answer has been to marry the public sector with the stock market, so that private resources flow into public sector companies, while the government retains control (which suits the ministers and bureaucrats). Hence also the Left's willingness to go along with 49 per cent private investment in many sectors.

But the real solution would come from addressing the huge fiscal deficit: 10 per cent of GDP if you take both the Centre and the states. The Left would argue that the problem can be licked by getting more tax resources, and there is some scope here""as the Kelkar reports have shown (but not by raising tax rates, because all that causes is evasion).

There is also correction to expenditure""by lowering interest rates on government borrowings (which the Left has opposed), and by cutting subsidies (which too the Left opposes). Finally, there is the business of getting better returns on the money that has already been invested in public sector companies.

Outside of the oil sector (which still enjoys monopoly profits) and perhaps telecom, these returns are pitiful. If anything, it is the reformers who are addressing the right issues: reform the public sector and if you can't, sell it and stop the bleeding; cut subsidies and borrowing rates; improve tax policies and facilitate compliance; cut the deficit.

All these would make the government/public sector more financially capable of investing in key sectors, because the government would then have more money to spare. But the way the Left wants it played, exactly the opposite will result.

Which wouldn't matter if the Left would allow private investors (Indian and foreign) to take up the slack. But it won't. The result will be less investment and slower growth. And that is the tragedy.