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October 18, 1999

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Business Commentary/Dilip Thakore

How to attract foreign investment: a few tips for the new government

The new govt has got its priority right: development Post-Independence India's long drawn out fourteenth general election is over. A new government -- a Jumbo one at that with a 70-member council of ministers -- has been sworn in. Once again, fresh buds of hope are sprouting in millions of hearts that the third Vajpayee-led government will be able to release India's long-suppressed development potential. Now comes the hard part.

The new government has made a good beginning with the prime minister giving economic reform top priority and warning his party-men and coalition partners to brace themselves for some tough decisions to get the economy back on track.

The socialist-cum-capitalist economic policies of the past half-century have created great distortions and imbalances within the Indian economy. The new government has no option but to draw up a new list of urgent priorities, and to follow a critical path plan which will facilitate integrated multi-sector development.

The first item on the agenda of a seriously reformist government should be the preservation of law and order. In this respect, the previous Vajpayee administration was found wanting. There were far too many atrocities committed against minority community citizens. Such indulgence is completely unacceptable and the full rigour of the law must be visited upon those guilty of persecution of religious and communal minorities.

Strict maintenance of law and order is desirable not only from a moral standpoint but also because it is the prerequisite for economic development.

The proportion of judges to population in India is very low and consequential judicial delay has adversely affected the enforceability of contracts. The Vajpayee government would be well-advised to heed the recommendations of several law commissions and expand the number of judges and courts to attain the global norm of 1: 30,000 citizens.

To its credit, the new Vajpayee administration has shown a healthy awareness of the need to rein in the galloping fiscal deficit of the Union and state governments. Together, the fiscal deficits have crossed the double digit mark. The new government is also trying to oxygenate the flagging economic reforms process.

Indeed, one of the unsolved mysteries of the previous Vajpayee government was why, in spite of its free enterprise Jan Sangh parentage, the economic policies of the BJP seem no different from those of the muddle-headed socialist Congress party. The least one would have expected from a BJP-led government was a firm foot on the public sector privatisation accelerator. Last time around, the excuse was a wafer thin parliamentary majority. This time, there is no room for excuses.

Actually, it is quite intriguing why there is a conspiracy of silence within the nation's intelligentsia about the vital cause-and-effect relationship between the ballooning fiscal deficit and the nation's haemorrhaging public sector enterprises. Surely, it is obvious that not only do loss-making PSEs fail to contribute to the exchequer by way of taxes, they also are a drain on the budget since they require subsidies and bail-outs.

Consequently, the case for privatisation is overwhelming. Moreover, privatisation of PSEs offers the chance to retire debt and reduce the Union government's huge annual interest payment burden which is the prime cause of the fiscal deficit.

Privatisation also offers the option of creating a consolidated fund for education. The NDA/BJP has a unique opportunity to leave its stamp and impress on Indian history by engineering the nation's long overdue (open and transparent) privatisation programme.

In the established Indian political tradition, the Vajpayee administration may fudge the issue, but there is a slim chance it will grasp this nettle.

The third priority of an administration has to be infrastructure development. No one in his right mind would deny that business transaction costs within the Indian economy are very high because of sub-optimal power supply and distribution systems, pathetic quality road networks, inefficient ports and telecom and postal services.

Therefore, rapid infrastructure development is the inescapable pre-condition of the 7-8 per cent annual GNP growth which is necessary for the promotion of low-income India into the community of medium-income nations.

But given the precarious state of the nation's finances, it is unrealistic to expect capital-intensive infrastructure development projects to be financed by domestic savings. Hence the need for an open door for foreign investment and the jettisoning of post-Independence India's DIY (do-it-yourself) development culture.

It is important also for pro-swadeshi (nationalistic self-reliance) ministers to understand that foreign investment will flow into infrastructure industries only if it is first welcomed into other sectors of the economy. Selective liberalisation is uninspiring.

True, the NDA government has many other items on its agenda. But first things first. That is what good governance is all about.

Dilip Thakore

Business

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