Economic revival or target practice?
by Virendra Parekh on 14 Jun 2012 0 Comment

Alarmed by the economic growth hitting a nine-year low, the government has announced a slew of measures to stem the slide, place the economy firmly back on the road to 9 per cent growth, and boost exports. A large number of infrastructure projects requiring billions of rupees will be awarded this year or soon as part of the plan announced after a high-profile inter-ministerial meeting chaired by the prime minister.

As said in the article “GDP Numbers: A wakeup call in the wilderness” (June 9), for long, India’s policy makers took sturdy economic performance for granted. Double digit growth that would propel the country to economic superpower status was almost regarded as preordained. The bubble is now being burst rather cruelly. Hit hard by global woes and domestic problems, India's economic growth rate slowed to a nine-year low, both in the March quarter at 5.3 per cent as well as in 2011-12 at 6.5 per cent. Industrial production virtually stagnated in April. With inflation edging up and GDP slipping, India is sliding into a stagflation from which it may be hard to recover.

Sharp observers like The Economist have been quick to hint that the fast period of 2004-07 was a one-off blip driven by a global boom, an uncharacteristic bout of tight fiscal policy and an unsustainable burst of corporate optimism; that India’s natural rate of growth is 6 per cent. Rating agencies are downgrading their forecasts for India’s growth.

The meeting convened by the prime minister was obviously an important visible attempt to do something in response to this challenging situation. It did not come a day too soon, for global and domestic investor sentiment about India is now at a tipping point. If the current state of listlessness and sloth continues, India is in danger of losing its standing and economic momentum built up over two decades through the hard work of successive governments and policymakers.

The meeting was attended by ministers and secretaries of what the Prime Minister’s Office (PMO) described as “key” infrastructure industries: power, railways, roads, shipping, civil aviation and coal. At the meeting, targets were collectively agreed on and finalised for the entire year.

As per the plans announced, two projects for brand new major ports will be taken up during the year in Andhra Pradesh and West Bengal at a total investment of Rs. 20,500 crore for an aggregate capacity of 116 million tonnes. 9500 km of roads will be awarded for construction and 4360 km of roads for maintenance in the current year. Work on Itanagar airport, costing Rs. 2100 crore, would be commenced and three new greenfield projects will be awarded in 2013-14. These will be  at Navi Mumbai, Goa and Kannur.

Besides, new international airports will be declared in 3 or 4 of the following cities -- Lucknow, Varanasi, Coimbatore, Trichy and Gaya. It has also been decided that an airline hub policy would be finalised and hubs would be operationalised at Delhi and Chennai by March 2013.

In power, the capacity addition target for this year has been fixed at 18,000 MW, including 2,000 MW to be added by the Kudankulam Atomic Power Project. Coal India will dispatch 470 million tonne of coal to all sectors, an increase of 8.8 per cent. PPP projects for railways include Dedicated Freight Corridor for the Sonnagar-Dankuni, and an Elevated Rail Corridor for Mumbai.

The plans are unexceptionable. Implemented, they would certainly increase investment expenditure in the short run and remove supply constraints in the long run. However, there is no mention of where the extra money will come from, no deadline for the completion of the projects. As usual, declaration of intent is regarded as a substitute for action.

Too many of the plans are no more than paper targets—awarding of contracts and finalizing of projects rather than real achievements. It is common knowledge what the true bottlenecks for new facilities are: land acquisition and environmental clearances. Both processes are political hot potatoes and are currently entangled in red tape. The land acquisition law continues to be debated.

The environment ministry is at war with the ministry of road transport and highways and, in fact, with practically most of the key infrastructure ministries. Many suspect that it is bringing back the hated licence-permit raj through the backdoor. Yet, the environment minister and the environment secretary did not attend the meeting. “Collective ownership” over infrastructure targets apparently does not include the ministry of environment and forests. Why?

The prime minister rightly said that growth had run into “turbulent weather” and would require a booster dose of massive investment in infrastructure. “Turbulent weather”, alas, could also be a great metaphor for evading responsibility, blaming Europe for the government’s red tape, regulatory dithering and the failure to provide a consistent policy environment. Even as the PM spoke of 9500 km of highways to be constructed and 4300 km to be maintained, the National Highways Authority of India does not have a head. Railways minister Mukul Roy conveyed his commitment by skipping the PM’s meet altogether. His Great Leader wants about Rs. 25,000 crore; otherwise she won’t say yes to anything. 

The prime minister realizes the problem of coordination between parts of the government. Verily, that may be defined as the central crisis of the UPA. Its ministries work at cross-purposes. The coal and power ministries, for instance, are sparring over fuel supply agreements. “I would expect,” he said, that ministries would “very expeditiously resolve any inter-ministerial differences or turf battles that may arise as we move forward.” This is optimism gone overboard. Quite often, the ministries have been set against each other—and Dr Singh has not stepped in to resolve the tussle. Instead of expecting his ministers to resolve their differences, he should have warned them that the PMO would resolve the issue for them, and not necessarily to the liking of either side.

As regards exports, Commerce minister Anand Sharma has set an export target of $500 billion by 2013-14, assuming that the Indian exports that rose 21 per cent in the last fiscal to reach $304 billion will do better. Of the seven key measures the minister announced, two stand out. The duty-free scrips issued against exports can now be used for payment of excise duty on domestically sourced inputs. Currently, these scrips can only be used to pay duties on imported capital goods and raw materials. The new measure will provide a level playing field to local vendors vis-à-vis foreign suppliers of inputs. In another measure, interest subsidy for exporters has been extended by a year. No one will cavil at that either. While these measures, coming on top of rupee’s depreciation, are good for exporters’ bottom line, they provide no reason why trade will rise.

The author is Executive Editor, Corporate India, and lives in Mumbai
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