From Business World of 15 November 2004.
India? A
superpower?
At the recent Hindustan Times Leaders’
Summit, finance minister P Chidambaram spoke about the prospect of India
becoming a superpower. I was the chairman. To liven up the matters, or throw
the cat amongst the pigeons, or provoke the minister, I asked him a question.
The Indian economy grows at 6½ per cent without anyone’s help. The previous
prime minister used to talk about making India grow at 10 per cent. The present
prime minister talks of 7-8 per cent growth, and makes even that sound
ambitious. Is the present government interested in accelerating growth? Or is
it in the business of redistributing poverty? Mr Chidambaram gave the only
answer a responsible finance minister could give: that accelerating growth to
10 per cent would require a rise in the savings rate to 40 per cent of GDP, and
that while it would be great if we can raise it, it would be unrealistic to
underestimate the difficulty of doing so.
A good answer –
and incidentally, the answer the Prime Minister would have given. For he learnt
his economics in the age of Harrod-Domar, according to whom the growth rate is
the ratio of the investment ratio and the capital output ratio. So with a
capital-output ratio of 4, one would need an investment ratio of 40 per cent of
GDP to achieve 10 per cent growth. A more neoclassical answer would be that the
capital-output ratio could be reduced by specializing in more labour-intensive
industries or using more labour-intensive techniques. But no one has found much
practical use for that answer. Whilst command economies like the Soviet Union –
and India in its socialist era – have achieved disastrously high capital-output
ratios, better run economies have not been able to reduce them much below 4 for
any length of time.
Remember, we are
here talking of investment, not savings. Savings does
not have to go up with investment; a country can import capital. China is doing it on
a vast scale; East Asian economies all did it in the 1990s. Both Manmohan Singh
and Chidambaram are conscious of this. That is why they keep defending foreign
investment against their leftist allies’ attacks. But at least in their
defence, they are dirigist. They talk of the need for foreign investment in
infrastructure; they cite the huge amounts of investment required for
telecommunications, power, roads and ports.
That is where
they may want foreign investment to go; but can they make it go there? Not if
the foreign investors can help it. In telecommunications, there is only one
foreign investor: because its partner, Essar, is always financially strained,
Hutchison Whampoa has poured money into their telephone companies one way or
another. It controls most of them; it has brought in money for most. Its
competitors have tried to make things as difficult as possible for it; one way
has been to lobby the government not to allow foreign investment over 49 per
cent in telecommunications. The limit on foreign investment keeps it out of
this industry which will need trillions in the coming years. And it is not the
limit alone. The fact that the limit is determined by politicians, and that
they can arbitrarily change the rules from one day to the next, puts foreigners
off. That is one reason why the Prime Minister is taking so much interest in infrastructure;
he would like to find a less political and arbitrary way of regulating it.
I think that a
country cannot attract foreign capital in a big way if it tries to sequester it
as we have done; countries that have received much capital have allowed it in
without industry and ownership restrictions. China is an exception. But its own
savings ratio is so high that it would grow more or less as fast as it has done
without foreign investment. Its industries are obscenely profitable. And it
routinely turns a blind eye to infractions of its rules on foreign investment.
A country that
wants to attract big foreign investment has first to convince foreigners that
it is a happening country, that it is growing fast, that there are profits to
be made in it, that there are opportunities galore in it. And the way to do it
is to grow thousands of profitable exporting firms. Exporters are inevitably in
touch with foreigners; if they look fat and chubby, foreigners will get the
message. To invest in an exporting firm, a foreigner simply has to give it
credit; as long as Reserve Bank does not interfere, exports by small firms will
automatically bring in foreign investors. And once they come in, maybe we can
get them interested in infrastructure – or make infrastructure interesting for
them.
