Why Atmanirbhar could be govt's biggest gift to Indian pvt sector in 30 yrs

Despite the largesse, however, it remains to be seen whether or Indian companies can shrug off the old habit of jugaad, tweaks and twists

The Indian private sector has rarely had it so good. The central government has begun to cede space to the sector at a scale not seen since 1991. The government has sweetened the deal by often blocking competition from abroad as well. Despite most sectors permitting 100 per cent foreign investment, the government has tweaked the rules to create barriers for entry and raised import duties on a large swathe of products. 

One of the most headline-grabbing episodes in this series has happened this week, just days ahead of the Independence Day. Defence minister Rajnath Singh released a list of 101 items which can only be produced by Indian defence manufacturers. Early this year, railways minister Piyush Goyal announced plans to let the private sector run 151 trains by the year 2023. Only Indian-owned companies are likely to be eligible. There is also the Production Linked Incentive Scheme (PLI) to encourage large-scale electronics manufacturing in India. It starts with the premise that the domestic electronics hardware manufacturing sector faces the lack of a level-playing field against competing nations. Then there are investment plans for building city gas networks where foreign partners have found prudent to tie up with Indian enterprises. And we are not even bringing in the restriction introduced in all government tenders of up to Rs 200 crore to be limited to only Indian companies. 

There is no comparable period going back decades to compare the present by a long shot. Just consider the evidence. In the Narasimha Rao-led government that came to power in 1991, the licensing rights of several government agencies were whittled down. Ministries of industry and public enterprises got leaner, allowing the private sector more room to function. But those were also accompanied by measures to bring in foreign competition. It was the reason why there was a revival of the so-called Bombay Club in 1993 among a section of the Indian industrialists.  

The short-lived United Front government under Deve Gowda brought in an open skies policy in aviation based almost exclusively on foreign investment.  While P Chidambaram in his first avatar as finance minister wrote an attractive budget, the benefits from it leaned more towards foreign investors--for example the plans to open FDI in insurance. The domestic private sector was happy to have the cover of a government circular--Press Note 18 (1998)--which gave it the right to veto any proposal by a foreign investor to change a domestic partner. 

In the six-year term of the Atal Behari Vajpayee government, there were plenty of measures like the New Telecom Policy, the Golden Quadrilateral plans for roads, and power sector reforms to please both domestic and foreign investors. But judging by the government announcements, it was clear that it was keen to gradually lift restrictions for foreign investors in most sectors, especially in manufacturing. The other area where investment rules were made easy was mineral exploration, including petroleum. It was the high noon of FDI policy. The specific measures to please the domestic sector included abortive reforms in labour laws and a more tractable one--a policy to promote Special Economic Zones. 

The Manmohan Singh-led government did not overturn any of these initiatives. In the first term, while it converted the Special Economic Zones policy into an Act that famously pleased the domestic private sector, it also sought to restrict the remit of the Indian private sector, like scrapping of Press Note 18 in 2005. It further liberalised FDI in pension and insurance, introduced FDI in retail, and lowered import duties from an average of close to 16 per cent to about seven per cent. 

These moves by one government after another should be read separately from the annual disinvestment plans that have, till recently, been the Government of India’s only acknowledgement of the role of the private sector in its scheme of things. It has had somersaults, some blitzkrieg and, till last year, was often used to finance the fiscal deficit. 

So all things considered, the current economic policy of New Delhi is a remarkable turnaround even for the NDA government. In his first term Prime Minister Narendra Modi was far more committed to keeping the state-run companies at the vanguard of the management of the economy. 

The private sector has reasons to be surprised at this generosity. The government had offered few clues till early this year before it made these successive announcements about its plans. One of the reasons the private sector is surprised is the scale of projected investments they need to make from now on. It makes little sense to operate a single train set, for instance. Economies of scale will need an operator to take up close to 20 trains or more, which works out close to Rs 4,000 crore as initial investment. The railways expect an investment of Rs 30,000 crore for the entire project. 

For defence projects, the sum is expectedly much larger. The government expects the orders from the three services-- Army, Navy and Air Force--to be a cumulative Rs 4 trillion in the next five to seven years to be taken up by the Indian private sector.  

There are exceptions of course. In the PLI scheme, while foreign companies expecting government subsidy need to show a consolidated global manufacturing revenue of Rs 10,000 crore, for domestic companies the threshold is just Rs 100 crore. With the differences, it is impossible to expect the scale and quality of the two to match up. Yet, few companies are immediately ready to take advantage of the offers. Only a handful had readied themselves with the needed cash surplus and low leverage to undertake the expansion needed. For instance the entire private sector has not been able to rustle up more than Rs 3 trillion of annual investment in the infrastructure sector in the past two years, according to the finance ministry’s Report of Task Force on National Infrastructure Pipeline. It was even lower in the years before. 

However, S P Shukla, Group President, Aerospace & Defence, in the Mahindra Group notes this low level of spending was because there was no visibility till recently of the market that they could explore. “The announcement to earmark Rs 52,000 crore for domestic capital procurement fulfils a longstanding recommendation made by the Ficci Defence Committee to provide long-term visibility on defence procurement plans. Industry can now plan its capex and production capacity.”

Yet, in the middle of the hoopla, there are notes of caution from respective industry leaders. N Chandrasekaran, the chairman of Tata Sons said last week, “Jugaad, tweaks and tricks will not fully solve the present-day problems”. Instead he advised private sector companies to make the right (scale of) investments, starting with the fundamentals. He was warning against the habit acquired by segments of the private sector to offer quick-fix solutions instead of investing in research and only then ramping up capacity.  

On the same note, another industry doyen, Deepak Parekh, advised the RBI not to extend the loan moratorium. Business Standard has quoted him to say that some borrowers, who otherwise have the ability to pay, are taking advantage of the relaxation offered in April this year. What he left unsaid is that their adventures fall within the definition of jugaad, tweaks and tricks. RBI has, however, decided not to extend the moratorium, but has instead set up a committee under former ICICI Bank chief M V Kamath to consider each case, individually.

The Indian private sector has therefore got a massive vote of confidence from the government after a thirty year wait to take on the task on hand. Whether it can shrug off the old habit of taking short cuts is something for which there are no earlier episodes to provide guidance.