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So where will the money come from?

Published by The Straits Times, Singapore on 2004-05-26

PARPATGANJ (India) - This community is about an hour away from New Delhi by a six-lane highway. Verdant fields of maize roll away on either side of the road, and in the fields are tractors driven by healthy peasants. There are occasional industrial parks along the way, with neat rows of trucks lined up behind factories. Billboards advertise a vast array of consumer goods. There are also signs pointing to nearby tourist destinations, some with monuments dating back hundreds of years.

Parpatganj suddenly shows up beyond a turn - rows upon rows of well laid-out apartment buildings, schools with large yards, wide streets lined with mangrove and plane trees, a movie theatre or two, a busy bazaar swarming with buyers. The township houses bureaucrats, academicians, and white-collar workers, members of India's growing middle class.

This is the India that the new government of Prime Minister Manmohan Singh wants the world to know more about, an India of well planned towns, productive fields and factories, a country of ample availability of affordable consumer durables - a nation, in other words, that's open to foreign investment as it seeks to speed up modernization for its 1.1 billion people. Yesterday (Tuesday) Dr Singh's Finance Minister, Mr P. Chidambaram, said that along with foreign direct investment (FDI) there would be massive government investment in infrastructure development, agriculture, and job generation in the manufacturing sector in order to accelerate sustainable economic development.

There's one problem with all these lofty ambitions, however: No one knows where the money's going to come from. Foreign investors aren't exactly rushing to India, notwithstanding the recent elections that saw an orderly transition of power from the National Democratic Alliance to the Congress-led United Progressive Alliance.

The question of foreign investment is especially sensitive because it directly pits India against neighbors such as China, Malaysia, Thailand and Pakistan. India received some US$3 billion last year, compared to US$53 billion for China, and US$10 billion for Thailand. 'This is a puny figure, especially in view of what India has to offer,' says Mr Gurcharan Das, an economist and former CEO of Procter and Gamble India. 'Despite the economic liberalisation of recent years, there's this lingering image of an India knotted by red tape and bureaucratic controls. The foreign investor just isn't given the kind of hospitable reception that China does.'

Mr Salman Haidar, former Foreign Secretary of India, added: 'Foreign investors need to be told in no uncertain terms that they are welcome in India. They need to be told clearly that our economic reforms will continue. They need to be told that India is aiming for a 7 percent to 8 percent annual growth rate - and that it's not going to revert to being an inward-looking economy that it once was. Investors need to be told that favorable conditions remain for their money - skilled labour, generous tax laws, a good infrastructure, political stability.'

But India hasn't made any special play for foreign direct investment. Although several agencies exist to invite such investment, they are run with the traditional mix of lethargy and bureaucratic rigidity. During a visit to one Indian government office in the Middle East recently, a potential investor found himself filling out several forms just to obtain informational literature.

To some degree, Indian officialdom may be lulled by a misleading sense of comfort flowing from the fact that foreign institutional investors (FIIs) have been active in the equities market here. So far this year, India's net equity inflows have been US$3.4 billion, second in Asia only to South Korea, which has received US$10.7 billion. In the 12 months since May 2003, emerging markets in Asia have received US$45 billion, with South Korea again topping the list with US$24.7 billion. Taiwan got US$11 billion. India's share has been US$9.7 billion.

Inflows into the equity markets, however, are highly volatile. This month alone, investors have pulled out US$3.8 billion from Asian markets; last week, after Communist allies of the Congress Party came down hard against privatization of public-sector behemoths, foreign investors pulled out tens of millions of dollars from companies on the Mumbai Stock Exchange.

As cabinet members such as Mr Chidambaram and Mr Kamal Nath, the Minister for Commerce and Industry, ponder their moves to generate revenues for the economy, they are certain to be vexed by the question of where to turn. If the Manmohan Singh government is to slow down privatization - or 'disinvestment,' as it's known in Indian political parlance - that alone would result in a shortfall of billions of dollars for the treasury. Since the tax base cannot be enlarged much, one solution would be to increase tax rates on the wealthy. In next month's budget, it's virtually certain that new taxes will be applied on entertainment, first-class travel, and luxury hotels.

Yesterday, the Reserve Bank of India even suggested that the formidable deposits of non-resident Indians (NRIs) be taxed; since such deposits amount to more than US$4 billion annually, the income from taxes would be considerable. The danger, however, is that NRIs might pull out their money and place it elsewhere - like Singapore, for instance. There's also more than US$118 billion that India has accumulated in foreign-exchange reserves - but the government has ruled out tapping this money for domestic expenditures.

It's also difficult to see how the new government is going to raise new public money to boost agricultural production, especially since the national deficit is 4.8 percent of the US$600 billion gross domestic product. Indian farmers are traditionally exempt from any taxation. Indeed, wealthy farmers often get high subsidies.

Mr Das has suggested that the government should allow small and medium-sized farmers to lease out their land to large agri-businesses that could exponentially increase production and thus generate taxable revenues. India has more arable land than China - which is bigger in land mass - and this country's competitive advantage in agriculture, says Mr Das, can be enhanced if the government promotes relatively low-cost programs such as drip irrigation.

But the very thought of letting big corporations into agriculture is anathema to the Leftist allies of the ruling Congress. And national economic policy is usually shaped not by common sense or even financial exigencies but by hardcore politics. Prime Minister Manmohan Singh may soon have to start printing rupee notes in his basement to pay for the promises of his government.

Pranay Gupte,
Senior Writer and Global-Affairs Columnist

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