Percy doth protests too much

Percy Mistry has a piece in FE on how much of investments India has to undertake in the next six financial years (beginning April 2014) to achieve a GDP growth of 8% to 9% per annum sustainably. His estimate of six trillion dollars is subject to a lot of important assumptions. India may not need so much of incremental investment. Some improvement in capital and labour productivity can make up for the incremental capital outlay that is required. De-clogging the regulatory and fuel linkage logjams in the power sector could add up to 2% to GDP growth. So, we are not sure if the number is sacrosanct or is really necessary. Further, in a later part of the article, there is a reference to another number and that is USD8-9trn. Quite how to reconcile the two is beyond TGS or, at least, beyond this post.

On the face of it, the number looks high. Certainly, as a percentage of India’s nominal GDP which stood at USD1.84 trillion in 2012, the investment/GDP ratio will be more than 40% in 2014-15 if one divides the USD6.0trn equally in the next six financial years.But, as nominal GDP growth is in the range of 12% to 15% per annum, this ratio quickly drops below  30% (33% for instance in 2016-17, assuming a rather reasonable 13% nominal GDP growth) and the ratio of investment/GDP is as low as 23% in the terminal year – something eminently do-able with Indian savings.

In other words, the requirements are not such as to warrant the recommendation of a drastic U-turn on India’s attitude to foreign capital. Some old mindsets that have crept in lately do have to be discarded again and one needed to become at least agnostic from being hostile towards foreign capital. But, Indias’ needs to not warrant India becoming a supplicant towards foreign capital.

So, what are his recommendations?

It must open up completely to foreign capital inflows.

It must entirely stop discriminating as absurdly as it does between foreign and domestic investment

Its financial system needs to be liberalised swiftly to a degree beyond the ambitious targets implied by the Mistry (2007) and Rajan (2008) reports.

The failure of the FM to get long overdue insurance legislation passed in the last Winter Session of Parliament has severely damaged his international credibility.

These are red herring and our antennas and eyebrows both go up. These have only tangential relationship to the subject of attracting capital the case for which is overstated by the author. For example, no country in the world can afford to treat and treats domestic and foreign capital alike. Nor has any conceptual or empirical case been made linking financial liberalisation to attracting capital. Long-term capital requires policy certainty to a degree, reasonable taxation, rights of repatriation and no retrospective legislative change. Linking financial liberalisation to attracting long-term capital is spurious.

Further, many important issues remain to be sorted out before red carpets are rolled out without reservations. The trans-Pacific Partnership accord is modelled after the US bilateral investment treaties. It proposes that investors be given the right to sue sovereigns. Check out this paper by Prof. Kevin Gallagher of BU on the implications.

Many countries in the European Union are uncomfortable with this right of investors (companies or individuals) to sue sovereigns. Indonesia plans to scrap bilateral investment treaties.

So, proposing a blanket red carpet treatment for foreign capital raises many eyebrows.

Those who overstate their case and do so rather heavily risk not only being ignored but also questioned as to their motives. More importantly, they achieve outcomes that are opposite of what they seek.

[p.s: Good friends Rajeev Mantri and Harsh Gupta had written a Op.-Ed. in MINT in 2011 on ways of tapping the domestic capital base. Worth reading and acting up on those suggestions first]


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