By Nantoo Banerjee
The government’s post-budget announcement giving a host of new tax reliefs and concessions to industry, including making violation of the corporate social responsibility (CSR) mandate only a civil offence abolishing criminal prosecution, may be good news for the stock market and select business establishments, but they will have little impact on much needed big investments in big projects. The purpose of these announcements remains unclear except that they will improve the business mood. May be the government discovered that some of the budget provisions were less business friendly and needed correction to win the heart of big corporates and portfolio investors at a time of crippling economic crisis. The concessions to the automobile manufacturing sector are understandable though they are unlikely to lift the industry out of the current recession. The public perception is that the latest slew of measures are intended to counter the growing negativity about the economy while promising further relaxation of rules and lower compliance burdens on companies. Unfortunately, the growing negativity about the economy is real. Ask the government think-tank, NITI Aayog, economic ills are quite serious and widely spread. They need serious curative treatment and not light cosmetic surgery.
The government may have been taken aback by Niti Aayog Vice-Chairman Rajiv Kumar’s public admission that the ongoing “financial crisis” is “unprecedented”. He said the government must take steps to handle the present economic slowdown. He talked about a liquidity crisis wherein lenders had stopped funding businesses, resulting in a situation where they had to survive on cash. “This is an unprecedented situation for the government of India. In the last 70 years, nobody had faced this sort of situation where the entire financial system is under threat and nobody is trusting anybody else. Within the private sector nobody is ready to lend, everyone is sitting on cash,” said Kumar. Though the Niti Aayog vice-chairman’s diagnosis of India’s economic ailment is partly correct, he seems to have deliberately avoided the aspects of the growing unemployment and the government’s unfinished agenda to build a strong basic industrial infrastructure. Assuming that there is no liquidity crisis, does India have many businessmen who are ready to build world-class shipyards, world-class highways and motorways, high-speed rail networks, high-speed engines, world-class ports, launch top-class container lines, reliable domestic and international airlines, giant construction companies as one finds in other Asian countries such as China, Japan, South Korea, the Philippines and Indonesia, giant mineral extraction companies, logistics and energy firms?
The liquidity crisis NITI Aayog and the industry have been talking about is partly the latter’s own creation. When two dozen large companies recklessly burn the assets of state-run Indian banks worth close to Rs. 3,00,000 crore, along with several thousands of crores worth equity investments in these firms by ordinary shareholders, how can lenders be blamed for the current liquidity crisis? Only 12 companies together — Bhushan Steel, Lanco Infratech, Essar Steel, Bhushan Power & Steel, Alok Industries, Amtek Auto, Monet Ispat, Electrosteel Steel, Era Infra Engineering and Jaypee Infratech, ABG Shipyard and Jyoti Structures — reportedly account for nearly 25 percent of total bank NPAs. Add the defaults by companies operated by fugitive NRI businessmen such as Vijay Mallya, Naresh Goyal, Nirav Modi and Mehul Choksi, the NPAs would grow to dizzy heights. How can lenders simply trust such borrowers? It also explains why “within the private sector nobody is ready to lend.” The present economic downturn has a lot to do with such private enterprises that stopped their businesses, throwing lakhs to people jobless. Ironically, the government is still ready to play in the hands of such private sector enterprises, offering them more and more tax sops and cash bonanzas, hoping that they will invest to grow the economy.
Neither the government, nor its policy makers are willing to learn from the other successful economies in the region, where the governments have been playing lead roles to grow their respective economies. In China, state owned enterprises (SOEs) have been playing a pivotal role to the country’s economic growth in three basic ways: first, they stabilise growth in economic downturns by making massive investments; second, they promote technical progress by investing in riskier areas of technology; third, they establish an efficiency-wage mechanism by providing workers a living wage. China favours a higher share of SOEs for its growth and tends to offset the adverse effect of economic downturns. The share of SOEs in China’s $13-trillion-plus GDP is bigger than its burgeoning private sector. China also has the world’s largest total banking sector assets of $39.93 trillion (268.76 trillion Yuan) with $27.39 trillion in total deposits.
Russia’s SOEs have increased their already sizeable share in the economy in the past five years despite calls from President Vladimir Putin for increased competition. Russia’s state-run banks controlled 66 percent of the banking system last year, up from 59 percent in early 2017. In Indonesia, the Asean region’s fastest growing economy, massive infrastructure projects by SOEs have vastly helped the country improve its logistical performance. Under President Widodo, SOEs have boosted their participation in Indonesia’s infrastructure development in a big way. In Vietnam, another fast growing economy, SOEs officially contributed 28 percent to its GDP in 2018. They invest in projects where private enterprises shy away. Unfortunately, in India, still in its early development stage, the government has practically stopped investing in its SOEs and depending increasingly on the cash-trapped and often unreliable private sector to lift its economy. Naturally, this is not working out. India’s private firms are neither capable, nor interested in capital and employment intensive projects carrying long gestation period and offering slow and low returns. Surprisingly, the government too is showing no intention to invest big in basic industry. The years of neglect in this key area of investment has mainly slowed down the economy. (IPA Service)