India can absorb capital inflows, but more land, labour reforms needed: CEA
V Anantha Nageswaran said unabsorbed capital can lead to credit allocation to nonproductive areas
India’s $3.7trillion economy is wellpositioned to absorb (the expected flood of) capital inflows than ever before, but reforms are necessary, says V Anantha Nageswaran, Chief Economic Advisor to the Government of India.
Nageswaran credits India’s growing absorptive capacity, at least in part, to the productionlinked incentive (PLI) scheme covering 14 sectors, including the capitalintensive semiconductors.
However, the economist underscores that to be able to take in capital inflows and not end up with a problem of plenty, India should undertake “granular reforms,” particularly in land and labour, which calls for the cooperation of both the central and state governments.
Nageswaran was answering questions posed by businessline’s Editor Raghuvir Srinivasan, at a breakfast with businessline meet — a gathering of Chennai’s business community organised by businessline and hosted by ITC Grand Chola hotel.
MANY AVENUES
“Today there are many areas where the capital can be productively absorbed,”
Nageswaran said, responding to a question on how prepared India is to take the capital flows, which would happen especially if the US started lowering interest rates.
India is estimated to have received $50 billion in foreign portfolio investments in 202324, a trend that is likely to sustain. The CEA cautioned that unabsorbed capital could create problems by leading to credit allocation to nonproductive areas.
VIKSIT BHARAT TARGET
Asked if the Viksit Bharat target of $30trillion (GDP) by 2047 is realistic, he said, “Is it realistic? Yes. Is it achievable? Yes. Is it easy? No”. He pointed out that the “global backdrop” now is very different than when China was growing between 1980 and 2010. China had it favourable in terms of globalisation, opening up of markets, and the narrative on climate change not being there. But the $30trillion target is not unachievable, and the target factors in the inevitability of the growth rate coming down due to the base effect.
“It is possible for us to grow 910 per cent in the next 810 years. That will take us to $7 trillion by about 2031,” he said. But the large base could also work in India’s favour, as “size gives heft, and more trade will happen.”
However, it is important to bring about “factor market reforms” (land, labour, etc.), which are under the ambit of both the Central and State governments, he added.
Krishna Ella, Executive Chairman, Bharat Biotech International Ltd, wants the regulatory system overhauled, so as to ease inflow of foreign direct investments into the life sciences sector.
Calling regulations “a major hurdle”, Ella observed that startups in life sciences were facing huge challenges. “The ₹1lakh crore corpus allocated for driving R&D and innovation would not serve the purpose if the current regulatory system continued,” he said, at breakfast with businessline, a meeting of businessmen with V Anantha Nageswaran, Chief Economic Advisor to the Government of India. The meet was organised by businessline and hosted by the ITC Grand Chola hotel on Tuesday. “In India, the regulatory system suspects everybody as a thief, and in the process, every file goes through too much scrutiny and too many Ministries. For example, in the life sciences sector, we had to handle five ministries in the regulatory process. Today, no startup can succeed in the life sciences sector. However, the IT sector is a predictable system because there are no regulatory hurdles. So they are successful. So the life sciences sector is highly regulated and the startup ecosystem is choked in this sector,” he added.
He felt India could follow the regulatory system in the US or Singapore to make things happen.
Responding to his observations, Nageswaran admitted that a cultural shift needs to happen pertaining to regulatory systems. There is a need to evolve and move towards a regulatory framework where we have to make a tradeoff or a choice between facilitating economic activity or making sure that economic activity is compliant first. Which one is more important? That subject is being debated by the governments, he said.
EASE OF STARTING BIZ
Discussing ease of doing business and compliances, Satyakam Arya, MD & CEO, Daimler India Commercial Vehicles, highlighted the mammoth compliance process they had to follow in a recent financial exercise. “There were about 4,700 compliances which we have followed and that’s pretty big,” he said.
He said the country needs to change its approach. “Currently, we are more focused on the ‘ease of starting a business’ than ‘ease of doing business’. With our federal structure, it becomes quite complex. I think we need a fresh approach here and an incremental approach will not work. If we can create a Council where the central government with the state governments can regularly review and dramatically bring this down, it will help every one of us,” he added.
Responding to his views, Nageswaran agreed that though doing business has become easier when compared with 1012 years ago, there are still a set of issues to be addressed. “Of course, a lot of attention and focus has gone into it and in several areas, systems have improved. But the amount of work that remains to be done is equally substantial.”
P Ravichandran, President, Danfoss India, recommended that the institutional repositioning of the Bureau of Energy Efficiency is much needed right now because today the Energy Efficiency Bureau is sitting under the Ministry of Power. It has to navigate the Ministry of Environment, Forests and Climate Change and several other ministries including DPIIT, and the Ministry of Finance.
In most countries, Indonesia, for example, the net zero targets are under the Prime Minister’s office and it is easy to attract more global funds as well. So the institutional repositioning of the Bureau of Energy Efficiency will be of great help.
3 FOCUS AREAS
Silai Zaki, Australian Consul General in Chennai, posed a question to the CEA – In a perfect world what three reforms would you introduce in India to ensure it reaches the growth targets?
Nageswaran replied that the first focus would be to ensure ease of doing business for MSMEs in the country is attained. “Because for them, the management bandwidth is limited and the amount of time and resources they dedicate to compliance is substantial – both at the Central and State levels. This needs to be addressed,” he said.
The second focus area is energy security – this is not more of reform, but that is a reform element implicit in it. Reforming the power distribution companies and making power generation economically viable will be important. In this, we also have to navigate the challenges we are facing on energy transition from the developed world where the discourse is quite uneven, unbalanced, and even unfair. “it is more a geopolitical challenge than a domestic reform challenge,” he added.
The third area is to ensure an adequate supply of skilled labour for the industry. While it is beneficial for the industry, it will result in creating income generation for the Indian youth. “This is how India can reap the demographic dividend. Therefore continuous attention to learning and skilling outcomes will be important,” he said.