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Funding India’s growth - Views on News from Equitymaster
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Funding India’s growth
Jun 21, 2007

In a world of globalisation, growth significantly depends on the amount of funds that can be raised. Thus in any analysis of past data, a lower interest rate regime tends to show up as boom time for building up capital, provided there exists no excess capacity. Due to political exigencies in the cold-war era, India learnt to be dependent singularly on own savings and government deficits. Throughout the eighties, though the government ‘printed’ more money as deficits soared, precious little was spent on the by then nationalised infrastructure sectors like power, mining, roads, airlines and airports, ports and ship building, and what have you. Indians are among the world’s better savers - they save on an average 30% of their incomes. Unfortunately, as the financial sector too was nationalised, it was easy for the government to subvert the savings into its preferred channels, and thus probably not put to their optimum use - neither for the banks nor for the economy.

Government yet the big ‘Daddy’
Over the last few years the trend has changed - the deficits reduced, the government allowed banks to lend more to the 2 to 10 times more productive private sector (McKinsey report). And the resultant growth has been stupendous. Yet there are miles to go. At 34% of FY07 GDP, actual savings would amount to about Rs 12,000 bn. Of this, Rs 6,000 bn is saved with the financial sector, forming the corpus for lending to finance growth. Through Statutory Liquidity Ratios and other acts of the parliament, 25% of bank deposits, 50% of insurance money and 90% of Provident fund assets have to be compulsorily invested in government bonds. When all is said and done, the private sector gets about Rs 3,000 bn in all to invest afresh every year.

A snapshot of the requirements
When we stand on the other side and look at the projections of funds required for just easing the various infrastructural bottlenecks, we get some sense of the amounts required annually to make life easier for an average Indian with the real rate of GDP growth at about 9%. Since the late nineties, we have had various estimates given by various study groups. The committee under Dr. Rakesh Mohan (now RBI deputy governor) established in the late nineties that power, transport and communications alone would require Rs 2,300 bn every year. This figure today has increased to Rs 2,600 bn in the studies undertaken by the Planning Commission and the Investment Commission (under the aegis of Mr. Ratan Tata). Additional investment in steel, cement, mining, knowledge industries, and finance increases the need for annual investment to Rs 5,500 bn.

This should raise our investments to about 40% of domestic income or GDP from the current 34%. China, the country that is fast setting the bar internationally, has moved from 34% to investing about 44% of its GDP annually in the last one decade.

Sources can be milked further
One way to bridge the investment gap of about Rs 5,000 bn would be to reduce the pre-emption of the domestic savings by the less productive government machinery. This would require faster pace of privatisation and an amazing amount of belt tightening by the politicians. A leading magazine recently calculated the annual cost of keeping 20 ‘dead and useless’ central ministries alive at Rs 740 bn. Add on wastes at the state and municipal level, and we free up some 3% of GDP! This money invested in more productive channels will itself set the ball rolling by increasing the stock of savings as incomes themselves grow at a faster pace.

Even as a major portion of this growth is funded from within India, the cash rich outside world is banging at the door, happy with the returns on investment it gets in India. An RBI study has calculated a 17.4% return on equity for the multinational companies operational in India. But the scale of funding from this source is yet very miniscule. In the first nine months of FY07, India got in Rs 740 bn from overseas (her overall balance of payments). This amount has to grow five-fold, ushering a stronger currency in its wake when it does actually happen. But before we expect any action on that front, the government has to reduce its scope by allowing and then setting up structures through which private money – Indian as well as overseas –can be spent where it should be.

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