Can policies be better framed to harness India's market potential?
Why is so much investment flowing into India's securities markets? Probably because of (a) India’s market size and (b) growth, despite all its inconsistencies and difficulties. Are higher price-earnings multiples desirable? Yes if they are sustained, because more capital is available for equivalent productivity; otherwise, no. The question is whether policies can be better framed to harness the market potential.
India’s large market with its headroom for prosperity seems propelled partly by its own momentum, and its stocks partly by liquidity. The net investment in mutual funds in 2016-17 of Rs 3.43 lakh crore was reportedly double the previous year, the highest in the last decade. Domestic investment in pure equity funds in the last two years exceeded foreign portfolio investment (FPI), because of lower FPI and higher domestic investment. Retail investors grew in the last three years from 28.6 million to 39.3 million. Other positive factors were a government with a strong mandate and falling oil prices.
Now, reasonable earnings from some large companies and rising global markets augur well, although earnings must improve broadly and a number of caveats remain. These relate to non-performing assets/loans (NPAs/NPLs), structural problems in sectors such as iron and steel, construction, power, telecom, transport, agriculture, continuing deficiencies in infrastructure and institutions, and in productivity. There are social pressures from divisive electioneering, a disturbing rise of exclusionary tendencies echoed globally, and government overreach. There are also self-induced crises because of inappropriate policies, as in telecom, unviable situations created by populism, or by judicial orders, as seen in telecom, coal and power. There could also be failure to improve productivity (by a third to 9 per cent, as during the growth years), or adverse external developments.
The room for improvement is epitomised by low per capita productivity. According to Bloomberg, the International Labour Organization’s output per worker for India in 2017 is 20 times lower than for Germany. Yet, expectations run high for India in reports from sources such as Euromonitor, the International Monetary Fund, London’s Centre for Economic and Business Research (CEBR), and PricewaterhouseCoopers (PwC). Euromonitor predicts India’s consumer market will be the third largest by 2030, ahead of Japan and Germany. Growth will be for products such as smartphones, automobiles, and durables such as TV sets, refrigerators and air conditioners. For instance, India is the third largest market for smartphones after China and the US. In automobiles, India is the fifth largest market with over 3.3 million cars sold in 2016 and continues to attract global manufacturers.
However, Euromonitor cautions against rising inequality with the Gini index rising from 39.9 per cent in 2011 to 41.6 per cent in 2016 and estimated at 43.4 per cent by 2030. The CEBR estimates that by 2028, India’s gross domestic product will be the third largest after China and the US. PwC forecasts that in 2050, India will be the second largest economy (in purchasing power parity) after China, the US being third and Indonesia fourth, with a caveat: “Emerging economies need to enhance their institutions and their infrastructure significantly if they are to realise their long-term growth potential.”
Can our policies better contribute to realising this market potential? Consider the options. One approach is open exploitation, unmindful of whether the ownership and distribution of profits is domestic or foreign. Prices are determined solely by supply and demand, without government regulation or any other authority. Another extreme is that the government decides everything, which has been seen to fail. A third option is a mix, with open-market principles in areas that can sustain them, such as in consumer goods, tempered with appropriate regulation, e.g., against harmful substances. Ideally, policies should be for the long-term common good with sustainable levels of equitable access. Regulation is essential where network economics apply with few players, as in electricity and communications. Our mix is not ideal because realpolitik and populism overwhelm the need for deep understanding followed by the objective and convergent deliberation needed to frame beneficial policies (through sound institutions, also lacking).
Our policies are often indifferent to where ownership lies, and sometimes, this is a problem. For example, heavy industries or electronics majors abroad often have government backing. Indian enterprises start with a disadvantage, because of restricted access to capital, and at higher cost. Another aspect is when the ownership of major local corporates with privileged access to markets changes to being majority foreign-owned, because the profits are sent abroad. Yet another is that we do not have ecosystems for manufacturing start-ups through commercialisation and scaling up, in terms of financing, production and procurement. Attention seems confined to early-stage start-ups or to small-and-medium enterprises, with no ecosystem to see them through to establishing scale, comparable, for instance, to the building up of Huawei through consistent procurement.
Our greatest deficiency, however, remains lack of good infrastructure. Correcting this requires a long view, capital, slow payback and long lead times for results, usually beyond election cycles. Easily sidelined for populist measures for immediate gains, this area needs concerted, bipartisan, societal convergence. A case in point is telecom and broadband, where spectrum auctions loom again, even as operators struggle with low revenues and high debt from previous auctions. Another is the recent Supreme Court ruling against compensatory tariffs for two ultra-mega power projects at Mundra, of 4,000 Megawatt (Mw) (Tata) and 4,620 Mw (Adani), based on whether a “change in law” applies only to Indian laws. If the tariffs were upheld, five buyer states would get a lower than average price paid, substantially below the current market price. If these projects become unviable, they will add to the deadweight of NPAs. The banks they owe will also suffer, and there will be the opportunity cost of benefits foregone from the lower-priced electricity.
There may be a case for prioritising infrastructure, beginning with defining our objectives and then framing policies to achieve them. For power projects, it’s reasonably priced electricity; for telecom, it’s reasonably priced services. Until these are made possible through appropriate policies, there’s little likelihood of realising our full potential.
Shyam (no space) Ponappa at gmail dot com
