Saturday, May 30, 2009

Priming the Indian Economy:Suggestions for Dr Manmohan Singh Government

Undoubtedly, India has managed its economy well amidst the global gloom and turbulence, relative to several advanced and emerging countries. Nevertheless, given our growth aspirations, the lower GDP growth rate (even if it went beyond the muted expectations) and the reduced level of investor confidence need to be addressed quickly by the new administration. In particular, the sharp decline in growth rates of the manufacturing and construction sectors is a cause for worry due to the likely cascading effect.

The positive vote received by the Congress Party and the UPA Government led by Dr Manmohan Singh reflects the desire of the people of India to build on the robust management of the economy for higher growth. Given that the previous Government desisted from unveiling a major economic stimulus plan possibly due to impending elections, and given also the unfinished economic reforms agenda there is a great potential for the new government to trigger major positive changes in the economy. This note summarizes the elements of a grand stimulus plan to take the economy to a double digit growth track.

Transportation Infrastructure

There can be no two views that the infrastructure in India is woefully inadequate, in terms of spread, scale, scope and efficiency. There is an urgent need for massive building of rail stations, bus stations, airports, sea ports, roads and bridges and waterways across the nation, spanning urban and rural areas.

India also lags the emerging economies such as China in terms of fast and economic transportation. Huge and productive investments need to be made in bullet trains, elevated rails, public transport buses and freight trains to ensure high productivity in transportation of men and materials in the country.

Together, the fixed infrastructure and mobility infrastructure should be the core of the economic stimulus package for the new Government. These investments will have positive cascading and multiplier effects across all industrial sectors and create millions of jobs, quite apart from enhancing productivity of life, and driving down the transaction costs.

Energy Infrastructure

Energy security is one of the critical needs of the economy. Energy shortages frequently cripple industrial and social activities in the country. The economic stimulus package will not be effective without a major thrust on energy. Building of new oil and gas rigs, greater exploitation of on-site and off-site energy sources, acquisition of overseas energy sources, building of nationwide oil and gas pipelines should merit urgent attention. These again will have significant cascading impact in terms of power and energy equipment manufacturing sector and construction sector. Within the energy sector, setting up of a whole new infrastructure for nuclear energy should form a discrete strategy. A mix of all sources of energy; conventional and non-conventional covering hydel, wind, solar, thermal and nuclear energy options need to be vigorously pursued.

Sunrise Infrastructure

Distinct from the core infrastructure is the sunrise infrastructure, which would be the Green Technologies. Alternative sources of energy, clean vehicles, green buildings, energy-efficient equipment are capable of priming a totally new wave of research and manufacture. They will help in the creation of a new genre of industries which will minimize energy consumption and enhance harmony with environment, while at the same time creating jobs from the most advanced research layers to the most needed basic foundations.

Positive Globalization

Globalization has come to stay; yet it is under threat due to a rising wave of protectionism in advanced countries. Positive globalization has three parts; (i) the globalization of value chain with a fair share for emerging markets based on factor competencies (not merely labor cost advantage), (ii) harmonization and opening up of all markets (in terms of customer access and transparent regulatory systems) and (iii) continuous churn of new technologies in the developed markets (leveraging the fundamental university competencies and funding strengths). The way China and Japan have collaborated in such globalization is an instructive model for other combinations of advanced and emerging markets.

India must participate in positive globalization by developing products for a wide spectrum of needs. Even as one generation of products is extensively globalized across the world, a new generation of products must take root. In such a model, products get developed in line with multiple market needs and purchasing power slabs, allowing whichever country is the inventive country to hold technological leadership in the new generation of products. India, of course, must play for inventive niche areas quite apart from becoming the manufacturing hub for the world.

University and Laboratory Innovation

In spite of all the failures that have come the way of advanced countries, these universities still remain the bedrock of science, technology and management, with the potential to trigger new waves of innovation and creativity. India has indeed a long, long way to go before university-led innovation becomes a national comparative advantage as in the US or Japan. It is necessary for the new government to step up investments in universities in frontier fields such as nanotechnology, stem cells, recycling, solar energy, biofuels, energy-efficient equipment and so on.

As in the case of National Institutes of Health in the US, it would be appropriate to set up new national institutes not only for health sciences but also for each of such sectors, if needed in 50:50 public-private partnerships.

Main Street and Dalal Street

One of the most profound observations made by President Obama in US is that there cannot be a thriving Wall Street without a thriving Main Street. It is indeed a universal truth for the modern times. The Main Street itself rests on a trio of education, industry and social services. Markets for products and services have to continually expand based on innovative and cost competitive products and services so that corporates can maximize wealth generation and the Dalal Street can then take a share of the wealth.

The core of the strategy should therefore be in terms of enhancing industrial and business competitiveness. All tools, from more efficient design to value engineering, from manufacturing productivity to supply chain efficiency and from information technology to artificial intelligence would need to be deployed to commercialize constantly new waves of products and services. Tax breaks for genuinely innovative R&D and manufacturing productivity, whether politically correct or not, appear to be economically justified.

Simultaneously, the Main Street corporates have to be released from the tyranny of Dalal Street (whether it is of quarterly guidance, analyst calls or rating scrutiny) as much as subject to competition from more competitive global companies. In the absence of such of thin and balanced approach, CEOs and CFOs would only be emphasizing the short run revenue and profit maximization to the detriment of long term innovation and strategic strengths of corporates. SEBI and the Ministry of Corporate Affairs must examine alternative reporting systems which focus on long term sustainability of businesses and corporates.

Affordable Healthcare

Healthcare continues to be a major concern in India. Cheap generic drugs provided some relief until recently due to India following a different patent regime. With harmonization of product patent regime that advantage has disappeared. The Indian society which is in any case faced with inadequate hospital infrastructure is now faced with high cost of medical treatment, whether domiciliary or hospital-based.

In this background, the unique “Arogya Sri” policy of the Government of Andhra Pradesh has served to revolutionalize healthcare for the masses in the state. This coupled with the state-wide emergency 108 service, has brought healthcare closer to the masses in Andhra Pradesh. Much more can be done in this area under such a progressive strategy, with public-private participation. The Arogya Sri concept needs to be reinforced and expanded on a national-wide basis by the new regime.

Simultaneously pharmaceutical firms need to be enabled to generate profits that can help them discover new drugs and manufacture high quality products. Pharmaceutical, medical and clinical research should be provided with liberal grants and tax breaks.

Tax and pricing breaks for industrial research

It is important that innovation in industrial research is continuously encouraged. It is disconcerting to see in this context that Indian firms have been unable to build critical mass of research. India is perhaps ranking lower both in technology innovation as well as technology imports (and absorption). These short-sighted approaches are clearly meant to manage the short run profit pressures. The new government should positively consider tax breaks for firms which invest in new product developments; each additional product domain entitling the company for a higher weighted average reduction of R&D investments.


A multi-pronged strategy of boosting investments in infrastructure, education and research, healthcare and positive globalization will constitute a grand economic stimulus which India needs to become an economic power-house in the years

Posted by Dr CB Rao on May 31, 2009

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