How To Boost India’s Economy? If It Is To Prosper, India Must Urbanise

Indian stock markets have recovered from their downward spiral triggered by the election of Donald Trump as the incoming president of the US, with his promise to impose heavy tariffs on imports, crack down on immigration and cut taxes. India’s dollar exchange rate has been sliding, along with India’s foreign exchange reserves. India’s central bank, the Reserve Bank of India’s (RBI’s) monetary policy review is underway, and the result is widely expected to be an increase in liquidity rather than the rate cut many have been clamouring for, ever since the Central Statistical Office reported India’s economic growth rate in the July-September quarter (Q2) to be 5.4%, sharply lower than most expectations.

Oil prices are on edge, following the revival of Syria’s dormant civil war, on top of the violence in Gaza and Lebanon, with the West desperately seeking to believe the claim of the Hayat Tahrir al Sham, an Al Qaeda offshoot that has taken over half of Syria’s second largest city, Aleppo, to have cut off ties with its terrorist parent. Russia and Iran are likely to rally around Assad, despite their own pre-occupations. It does not help oil prices that the oil cartel OPEC Plus is likely to postpone its decision to end production cuts.

In France, president Emmanuel Macron continues with his policy of forcing the extreme right and the extreme left of his political Opposition to demonstrate their disruptive potential, hoping, in all probability, this would put off voters and persuade them to vote for his centrist party in the next election. His prime minister Michel Barnier refused to compromise on his Budget proposals, despite his government not having a majority in Parliament. Using a special provision of the Constitution that allows a law to be passed without a vote, Barnier adopted his Budget. The only remedy the Opposition had was to bring in a vote of no-confidence, and vote the government out. And that has happened, automatically dissolving the House itself. With the Opposition having forced dissolution of Parliament, Macron now hopes to do better in the elections to constitute the next Parliament, likely early next year. Interest rates on French bonds have edged up, as a result of political instability.

Reviving Growth

In India, the main question is how to revive growth. Inflation is running above the RBI’s upper limit of tolerance of 6%. Vegetable prices remain volatile, cannot be controlled by modest rate changes, and push up the overall rate of inflation as measured by the consumer price index. Therefore, the RBI is unlikely to be keen to cut policy rates to stimulate credit growth, which has been, as of mid-November, a tepid 5.7% since the beginning of the financial year. Growth was supposed to get a shot in the arm from government spending, but spending has been below par. According to the Controller General of Accounts, government capital expenditure, seven months into the fiscal year, has been only 42% of the total budgeted for the fiscal year, sharply lower than the 54% achieved last fiscal.

Manufacturing growth has been 2.2%, mining has contracted. At 3.5%, agricultural growth alone, of all sectors, turned out to be higher than in the comparable period of last year. Corporate results are subdued, urban consumption, anaemic.

The government needs to do three things, for the economy to break out of its torpor. One, it needs to translate biggish budgetary outlays on capital expenditure into realised spending. Two, it needs to create a new public-private-partnership framework for infrastructure, to boost private investment in infrastructure. And, three, it needs to ask the RBI to hand over control and supervision of the government bond market to markets regulator the Securities and Exchange Board Of India (SEBI) to facilitate the creation of a more wholesome and integrated bond market.

Given lukewarm sales, companies are unlikely to invest massively in capacity expansion. Only those who diversify into new sectors are likely to show an appetite for investment. This means that the prime mover in investment has to be the government, and the area of investment should be infrastructure, where capacity utilisation is guaranteed to grow, given the scarcity of infrastructure of most kinds.

The government should undertake the riskiest early phase of building infrastructure, and let the private sector take over these projects and complete them. Since the government would, through its direct involvement, mitigate a lot of risk that would build risk premia into the cost of financing the project, were it left to the private sector, this model would allow for lower-cost projects, completed relatively fast

India Must Urbanise

What kind of infrastructure could be taken up? In addition to what all have already been included in the Budget, the government could consider setting up one or more new towns. If India is to prosper, it must urbanise. The current share of town-dwellers in the total population is probably around 35-36%. If half of India is to become urban, that would mean adding some 250 million people to the urban population. These numbers cannot be accommodated in the existing towns without turning them into overpopulated dens of crime and violence. We need to build new towns.

New towns are also needed to address the demands of combating climate change: building in both energy efficiency and climate resilience. Town planning can minimise commutes, and save energy on transport. Mixed land use, if properly planned, can enable walk-to- work. Planned sewerage networks, underground pipes to carry electric and telecom cables, drinking water, and, if necessary, natural gas, could make for safety and security. Buildings can be located and built to prevent the build-up of heat islands, slashing air-conditioning costs. Charging facilities for electric vehicles can be distributed across town, to encourage electric mobility. Habitats can be planned to eliminate the slums and ghettoes that blight most Indian cities. Large swathes of rental housing can be planned for, to house India’s increasingly footloose talent.

Land for a new town, once identified near major highways, can be procured by urging farmers to pool farm land and get back as developed urban land 12-13% of what they surrender to the new urban project. Different parts of the city infrastructure can be built by the government, the private sector or jointly by both. The finance should be raised via long-gestation bonds, whose risks are suitably mitigated by credit, currency and interest rate derivatives. A vibrant bond market is the only way this can be secured, and all bonds, government as well as corporate, and the derivatives that would mitigate their assorted risks should all be regulated by the self-same entity, SEBI. The RBI must be made to hand over control of government bonds to SEBI.

A new city to accommodate a couple of crore of the new urbanites India expects to have can absorb a lot of investment — public, and private, including foreign. It would push up demand for materials and labour, skills and entrepreneurship. And, cumulatively, push up the growth rate of the economy.