Sunday, December 6, 2015


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.