Goodbye Consumer Growth, Hello Infrastructure

Colours in motion- Georgia O'Keeffe

Goodbye Consumer Growth, Hello Infrastructure

As India approaches its 64th Independence Day, we could look at the present economic situation both as an opportunity and a threat. Only a lack of imagination, which we are, alas, quite capable of demonstrating, will make it six of one and half a dozen of the other. Meanwhile, the world media has been reviewing 20 years of Indian reforms, and wondering when the stream of progress disappeared underground like the legendary Saraswati.

Consumer growth, and in this, one needs to include, despite the stretch, private sector investment in capacity expansion/modernisation; is bound to be impacted by the RBI’s rate hiking spree, with the Finance Minister saying there may be more to come. Ditto for the equity markets and job market, though short-term debt funds are doing well in this high interest scenario.

On the street, this will mean fewer new cars and less frequenting of bars. It will mean less home buying and more renting. People will pre-pay loans and pay off credit card balances, even as new loans will grow scarce, particular, and pricey.

All this fiscal discomfort is upon us in the cause of taming inflation, particularly food prices, and also because it is now hovering at just under double digits, making short work of any earning increases one might garner.

But as usual, there is a silver lining to this cloud when it is realised that one need not quarrel with the stringent Government action to control inflation, because it can be done without sacrificing GDP growth too.

Except that the growth, like in China over several years of double digit postings, has to come from Government and public sector investment in long gestation period infrastructure, making up for shortfalls in resources by contracting foreign credit, development funds, and supplier/partner equity.

This will entail getting away from the paranoid dogma of post-colonialism and third world Socialism that imagines that every foreign trading partner is an avatar of The East India Company. Internationals have long shaken their heads in disbelief at some of our tender conditions. It is as if we are not only holier-than-thou but distrustful and precious as well.

Instead of this inferiority complex ridden outlook, we must attract Government-to-Government funding and expertise, like the Japanese funding of the Delhi Metro and its largely French know-how. Also, consortia, made up of public and private enterprises, nominally from home with its slim pocket-book, and substantially from abroad, instead of the other way around.

And all these players in it together, in order to make an equitable buck for each, while moving India’s developmental ambitions along.

This is the kind of investment both in financial quantum, and years, of input, before one can hope to see an output, that the private sector in India cannot properly handle. It is actually much too small. The public sector, unlisted in the most part, monopolistic in strategic areas too, is several times larger, as a recent report pointed out, but even they are not up to the task, both financially and managerially.

Fortunately, the Government is thinking along these lines already. Recently, it has moved to sweeten the terms of FII investment in infrastructure bonds with a shorter lock-in period, chastened by a luke-warm response to a three year sticker.

They also think it is time to permit substantial foreign investment in multi-brand retailing, not just in consumer durables and apparel etc. but food, and lift restrictive conditions on foreign entities, confined so far, tied to minority stakes, and wholesaling.

This is excellent news because, if implemented, it will prevent rot and wastage in our agricultural produce to market dynamics, create refrigerated cold chains, modernise procurement practices and raise value-addition and food processing standards, and raise the remuneration of farmers and other producers. But, setting all this in motion and thereby delivering new, qualitatively better options to the consumer at more competitive prices will, of course, take time.

Similarly, as consumers everywhere are bracing for higher electricity tariffs, it is a good time to put in those state-of-the art nuclear power plants from France, the US, Russia, Canada, Japan, that were fought for so hard by UPA 1.

Nuclear power plants have a considerable gestation period, before they get to turning out stable, long-term, and relatively cheap power. A nuclear power plant from France’s Areva, for example, has a life-span of around 60 years.

They need to be sited, because of threat of terrorist or enemy attack, not on the beach, like protest-ridden Jaitapur, Maharashtra, but in concrete secure installations underground, or inside hill-sides as if they were military targets. After all, they could well be, in the somewhat charged South Asian theatre.

But dozens of nuclear power plants, supplied in due course with domestic uranium, since we have now found very large deposits, plus one of the largest global availabilities of Thorium, makes this form of power generation the logical choice of the future. Moreso, since we have to import over 70 % of our petroleum products, and demand is growing all the time. Petroleum prices are indeed one of our most critical cost-push factors towards inflation.

There are other projects in the defence realm, the building of our own aircraft carriers and other large warships, nuclear submarines, the building of military aircraft, satellites, missiles and their delivery systems, protective and defensive clothing and so on, that can be developed in the interim. We can substantially help the economies of the West at this critical juncture, even as we help ourselves in these strategic areas to reduce our dependence on imports.  

Then there is the building of strategically important all-weather tunnels in the North West and North East.

And even if we accomplished only a small proportion of some of the things outlined here, along with other infrastructure work also underway, the building and retention of a 10% or more growth rate would be assured for several years to come, and this, with proper long-term contracts signed, without spiking inflation.

It would also, thanks to the new infrastructure to come, as the former Indian kings built palaces in times of famine, and President Hoover built the Hoover Dam during the Great Depression, set the stage for a prolonged consumer-led boom in the future.

The alternative to this growth by other means could well be not just a slow-down but recession. And while that will certainly stop inflation in its tracks, it will sorely damage, if not put an end to, the India growth story.  Surely we don’t want that to happen. Instead we want to reboot, at 64, the next leg of the Reforms process, led this time by the infrastructure sector.  

(1,104 words)

28^th July 2011

Gautam Mukherjee

Published as leader on Edit Page of The Pioneer as "Reboot and reform" on August 10, 2011. Also published simultaneously online at www.dailypioneer.com and archived there under Columnists. In addition, it appears in the day's ePaper as well.