The representatives of Indian industry - fondly referred to as “corporate honchos”, “leading industrialists”, “captains of industry”, “the face of new India”, or just plain “filthy rich” – are at the gates of heaven, poised to rush in.
Since the breaking of the various scandals over the Commonwealth Games, Adarsh (real estate), spectrum, oil and gas, iron ore, and coal the wonderful friendships and special relationships that many in Indian industry have had with their political partners and their allies in the bureaucracy has been in the spotlight.
And being in the spotlight means that no new deals have taken place: no progress on “resource allocation”. No “resource allocation” means that the investment in the machinery to extract the maximum value from the resources given to the industrial houses on the cheap have been on the decline.
This decline in lower purchases of machinery has resulted in a lower GDP (Chart 1). The media – owned by industrial families – is now in lobbying mode.
The facts may be different from the media perception. For example, if the government gave me spectrum at some 2003 price in the year 2007, it would be in my interest to buy and install as many telecom towers as I could. If raw material prices are gifted to me at 1/6th of their true cost (as per some estimates in a report by the Comptroller of the Auditor General) I would be a fool not to install towers to maximise the use of that spectrum.
All those telecom towers I build to transmit my spectrum require raw materials like steel and cement and people to install. And once built, I would like to see the spectrum utilised so I start to spend money on advertising. And then I get customers and I get an army of service people to sign up subscribers, answer complaints, and process all their payments. The people I hire - and the people I buy all these materials and equipment from for my business - have their own consumption, their own economic activity.
A virtuous cycle is created. There is economic activity. GDP grows. India shines.
A small detail: as the original owner of the cheap spectrum and the catalyst of the India shining story, I become very rich in the bargain. Chances are I am now a US Dollar billionaire with a lot of personal wealth and a lot of money to buy more favours.
If you break that chain of free spectrum, oil and gas, iron ore and coal, and land, the economy slows down.
My market cap and wealth collapses.
And I do what I know best: get my friends in the media to focus on the terrible data “coming out” of India. This distracts from the real and important debate of how India builds a sensible, sustainable, long term policy in place of one that allows the industrialist to pay a below-market price for resources that belong to the nation. The media hype orchestrated by me, frightens the nation into believing that the end of the world is upon us and we need a quick solution.
It really is that simple.
Add the fact that the global economy is in a terrible condition helps the industry-friendly press cook up the “news” that India is no longer shining. India is flat on its back and this “policy paralysis” must go. The government needs to act. Sorry, the government which is run by the friends of industry, needs to act.
The industrialists’ stranglehold over key national resources had been broken. Investments are down because the industrial families are not getting resources on the cheap like they did before. An alternative, transparent, and sustainable structure of finding a way to make the system of handing out resources to fuel economic growth is not in place. And it doesn’t look like it will be given a chance to be in place. The old “crony capitalist” system may be back.
The only, long-term, sustainable solution to improving investor sentiment is to have:
1) A transparent mechanism of resource allocation in the economy which ensures that tribals and citizens get rewarded for what they own,
2) A stable and sensible tax regime, not a regime based on vindictiveness,
3) Sensible and transparent platforms and products that take the large savings that we generate as a nation each year and use these savings to fund the development of the economy.
No, we don’t need any animal spirit.
We need transparent systems.