View: India needs to correct some structural flaws to revive growth


Growth is stalled for want of investment and because the mechanism for mediating savings to investment is broken. Merely cutting lending rates or creating liquidity will not do. Reviving growth calls for spending political capital, to fix structural problems.

Tell the farmer and everyone else they have to pay for the power they consume, that free power is toxic. Go the whole hog on cash subsidies for the farmer. Scrap subsidised fertiliser, irrigation, credit, insurance and power, and give farmers income support, instead.

This will help reconfigure cropping patterns to suit agroclimatic conditions and shut up US whining over Indian farm subsidies.

Stop Jagan Reddy from killing, just to spite Naidu, the most viable model of urbanisation India has hit upon, in Amaravati. If the new Andhra capital does not get built, no farmers can be persuaded, anywhere, to part with their land in return for a future fraction of it as urban real estate.

Recapitalise banks and kick-start the bond market from the subprime end of the spectrum, setting up a guarantee fund for bonds issued by medium enterprises and non-banking financial companies (NBFCs) that lend to small units.

Bail out all viable real estate and infrastructure projects.

Overhaul political funding to make it transparent, so that industry no longer needs to inflate project costs and take money out of projects during implementation, to build the war chest from which to pay off politicians and babus.

On the Make, in India

India has a distressingly low level of power consumption per capita.

Yet, there are no takers for the power many generators are eager to supply. Consumers go without power or run costly diesel generators for hours on end, and, at the same time, brave souls who ventured to generate power, took loans and set up plants, find themselves without buyers for their power, go broke, sell their family silver to pay off some of the debt, even as bad loans cripple the banks that lent to them. Blame politics. The Indian politician has conditioned the consumer to believe that asking him to pay for the power he consumes is, somehow, obscene.

Farmers get their power mostly free and unmetered. Unmetered farm connections then supply power to run small-scale industries.

Going by how much they pay for power, some electric arc furnaces in north India are the most energyefficient steel producers in the world. Reliable supply of power in the daytime will spawn an agroprocessing revolution in rural India.

Subsidised power, water and fertiliser have played havoc with cropping patterns. Sugarcane is cultivated in arid areas even as Bihar, with fertile soil and plentiful supply of water, grows little cane. India needs to grow less rice and wheat, more fruit, vegetables and oilseeds. Subsidised farm credit has converted rich farmers into moneylenders. Changing all this calls for political courage, to substitute cash for subsidised inputs.

Urbanisation is a product and driver of growth. Industry and modern services grow faster than agriculture, and these grow in towns, not on the farm. To accommodate new industry and services and their workers, new towns have to be built, spanning some 20,000 sq km to accommodate nearly 25 crore migrants from village to town, the mass of humanity that would relocate if India turns 50% urban, as it inevitably will.

Build New Towns

Land is the biggest constraint on urbanisation. Land pooling is what worked in Amaravati, and earlier in Indore, to persuade farmers to cede their land for building a town, in return for some 12-13% of the land they give up, now converted into valuable urban real estate. Political one-upmanship must not be allowed to kill this model. Jagan cannot be allowed to stall Amaravati’s completion.

Banks mediate savings to those who would deploy them as capital, but not in India. Banks are too burdened by bad loans and bankers too scared of inviting raids by law-enforcers who sniff corruption behind every credit decision. When banks stopped lending, their clients turned to NBFCs and their short-term loans, and turned insolvent when NBFCs were shunned by investors.

Neither banks nor NBFCs are capable of lending for the long periods over which infrastructure gets built and generates returns. Such longterm funds used to come from termlending institutions, which have morphed into banks. Ideally, such funds should now come from the bond market. A vibrant bond market calls for not just the instruments to hedge credit, interest and currency risks but also players beyond the big companies in a cosy relationship with banks. So, start with subprime borrowers currently shunned by the bond market.

Real estate and infrastructure projects do have inflated project costs and promoters who diverted money to fund greed and ambition. Incomplete, but inherently viable, projects should be taken over under debt resolution by banks, and completed with capital from, say, the National Investment and Infrastructure Fund. The promoters can be asked to complete the projects, in return for a fraction of the equity released in instalments, on completion of milestones.

All this calls, essentially, for political courage.

DISCLAIMER : Views expressed above are the author’s own.





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