Planning for the future


by Shri J Mulraj

Governments, and their agencies, must plan for the future. Some do, some don?t. The price of neglect is paid for by future generations. The seminal event of last week was the RBI credit policy in which a hike of 75 basis points, or 0.75%, in CRR (Cash Reserve Ratio) was announced. This was higher than the 50 basis hike expected, and would suck out Rs 36,000 crores from the system. The RBI is basically preparing for the future, and taking out liquidity to ward off inflation and, perhaps, formation of asset bubbles. Kudos to it!

The hike of 75 basis in CRR, sucking out liquidity, would not have any immediate impact, since credit offtake is low and the banking system has ample liquidity. It would impact bank profitability, since CRR balances with RBI do not earn interest. The pinch will come unless the Government, too, looks forward and curbs its expenditure, thus borrowing less. If, however, the Government continues to spend more, partly to continue the stimulus programme, then the borrowing required to do so would crowd out private sector borrowing and that would hurt industrial growth.

Looking to the high, 6.8% fiscal deficit, one can, therefore, expect a phasing out of excise concessions, in the forthcoming budget; a 2%-3% increase in excise duties, which were cut 6% to stimulate the economy, can be expected. The fiscal position would be worse because the expected inflow from the auction of 3G spectrum, will not come about, again, due to paucity of planning ahead. The defence establishment is, naturally, unwilling to vacate the needed spectrum until alternatives can be found; something that a responsible Government ought to have forseen and planned for. The auction is now planned for later this year, or perhaps in 2011, but that would be infructuous because the world would then have moved over to 4G.

One can also expect some other petty minded new tax in the budget, or some silly tinkering around with existing ones, which is the forte of our bureaucrats. That could spook the market, which would dip, providing a buying opportunity.

What are the Government?s options for reducing its fiscal deficit? It ought to reduce those subsidies which are unjustifiable, such as on petrol and diesel, which in no way can be based on helping the deserving poor. The disinvestment programme is proceeding in spurts and one hopes that the falling market would not derail this attempt.

But even in the disinvestment programme we do not think big enough. Metalloinvest, Russia’s biggest iron ore mining group, is reviving a plan to list in London, a listing that could take its valuation up to $ 20b. The Government holds a majority stake in several PSU banks, which restrain the valuations they could fetch. Reducing stakes to under majority cannot pose a threat to the Indian financial system; such a perceived threat could be mitigated by retaining a majority in SBI plus one or two other banks or groups thereof, whilst allowing others to go free. Chinese banks have done this with the result that 5 of the top 20 banks in the world, by market cap., are Chinese, including the top 3. Just 5 years ago, there were none. SBI, with a stronger financial history, ought to have much higher valuations.

In fact, the Government destroys valuations in companies it does retain. The oil marketing companies, IOC, HPCL and BPCL, are prime examples of public assets being systematically destroyed. Ultimately, they would be sold, for a pittance, to private players.

The other option is to phase out fiscal concessions given to stiumulate the economy, and one can expect that to commence from the Budget. Then there is, of course, a hike in tax rates (even though reducing rates has led to revenue buoyancy) or a dreaded tinkering of existing rates and provisions, the perennial senseless exercise that only benefits accountants and lawyers.

The biggest dent in the budget deficit would be made when gas finds are fully exploited. This could potentially hike GDP growth by 2%. This, however, is stuck in a corporate dispute winding its way through an interminable legal process.

The other game changing programmes are those of the ministry of Roads, Transport and Highways, which is planning an outlay of Rs 3 lac crores on road infrastructure. Such a spend would allow the creation, along the highways, of 300 new towns, each with a population of 1 m., which, in itself would send out huge economic impulses. The ministry of Power is also thinking ahead and planning a huge investment in much needed power. With power availability would come further economic impulses.

The world is moving over to carbon friendly, renewable sources of energy, and solar energy is a technology solution that needs to be planned for. The Ministry of Renewable Energy has set up the Jawaharlal Nehru mission for this purpose, but other countries, such as Germany, are far more progressed. Germany has encouraged solar roofs by giving an assured, an attractive, feed in tariff for such energy, for 20 years. This has encouraged the growth of solar roof investors, and the persons employed in solar energy now exceeds those in the auto industry in a country known for its automotive prowess! Costs of solar panels are coming down through innovation; Dow Chemicals has brought down roof panel costs by 30-40%. Given the good fortune of sunny weather, India should plan ahead to take advantage of such technologies, and innovate to improve upon them.

We do have the brains for innovation! A Mumbai based company ideaForge, has developed a hand powered charger for mobile batteries which works by rolling it over a surface. In automobiles, the Tata group brought out the Nano at a price nobody believed could have been achieved, and is now bringing out, together with a French inventor, a car that would run on compressed air!