Guns or butter, both need investments

Our common interest requires building a consensus on cash flows

"Money, money, money… makes the world go round".  This line from a musical set in the 1930s' Berlin is inescapable in the commercial, economic, and often the political aspects of reality. While the show emphasised escaping through make-believe, the real-world actually follows closely along.

Take India’s economy: Despite growth, without commensurate profits, employment, and wellbeing, we are marking time. Analysts point out that corporate profits languished since 2008, trending down as a percentage of GDP from 2010, excluding a minor improvement in 2017 . In fact, profits have not grown in real terms despite annual GDP growth of about 7 per cent for 10 years. This comes through powerfully in Chart 1. 

In the boom from 2003 to 2008, profits to GDP doubled from 2.8 per cent to 5.5 per cent. Growth was driven by investment and exports as well as by consumption. After the subprime crisis of 2008 and the recession, profits in India slumped, partly because of excess capacity, and the rising costs of additional debt caused by inflation targeting (the components being wages, taxes, corporate profits, interest payments and rents). 

Although profits recovered somewhat, they trended downward, and by 2018 were 3 per cent, the same as in 2003. By comparison, US figures (after a low of 4.95 per cent in Q4 2008) ranged from 9 to 11.7 per cent. Gross profit to GDP in the US was 20 per cent in 2015, while in China (2014) it was nearly 30 per cent (Chart 2). Surpluses are essential for investment and development, because neither can happen without them. Only thereafter is a higher wage-share affordable.

Of the decline in India from 2008 to 2018, about nine-tenths happened in four sectors: PSU banks (36 per cent), oil and gas (19), metals (18) and telecom (15). During this period, consumption replaced investment as the driver, with growth in sectors such as automobiles, consumer durables and retail. Some commentators expect these trends to continue, with some optimism on the revival of investment.
 

The counterfactual is that we haven’t had any required reforms of structure and organisation for surpluses to grow in PSU banks, utilities or telecom.  For instance:

• In banking, the NPA crisis remains, but the focus has moved away to elections.  

• Reliable electricity supply needs financial sustainability and stable pricing, and neither is available.  Coal mine auctions haven’t resolved resource costs and availability, while financial gambits in the form of race-to-the-bottom bids to start projects and sell out early, instead of staying for profits from operations, aggravate problems in pricing and delivery for renewable energy as for conventional fuels. The financial incapacity of state electricity boards has created another set of problems, compounded by continued populism (unsustainable prices).  

• In telecom there has been only one major reform for 5 GHz spectrum for WiFi, despite the new National Digital Communications Policy.  

Meanwhile, electoral wrangling threatens to further deplete the treasury, whereas the problem is the opposite: Lack of surpluses (profits, and ultimately, cash). Profits have been stagnant for a decade starting from UPA-II, partly because of the excess capacity of the boom. This has constrained development spending, because low surpluses have kept investments down. By contrast, investments and exports were strong from 2003-2008.

Several other social forces add to the downdraft.  

• One is a political system that encourages splintering and divergence. As large parties have established hierarchies, it’s easier to start anew to get and control funding for splinter parties around divergent special interest groups.

• Another is incomplete or dysfunctional design, whereas expenditure must produce surpluses. For example, a new metro service in one part of the National Capital Region does not connect with the Delhi Metro. What’s more, the interchange is separated by several kilometres, and is reportedly designed to end ultimately with a gap of 350 metres at street level.  A ‘rapid transit’ system that slows you down?  If this were designed by enemy action to tie up resources and make people unproductive, they could not have done better. Similar problems assail the design of communications systems that often don’t ‘connect the pipes’ all the way through, such as spectrum regulations that hinder communications, hastily applied GST regulations, or expressways with bottlenecks.

• A third is behavioural acts of omission or commission that increase costs and reduce surpluses.   Ignoring laws, rules and regulations, whether it’s driving down the wrong side, lane indiscipline, jumping traffic lights, breaking queues, littering, polluting, and such other lapses, including government agencies not paying bills.

• Yet another is accepting mediocrity, ignoring standards and protocols required for quality outcomes, products or services.

If we are to achieve surpluses, we will have to build a consensus focused on cash flows. The building blocks are ‘trainable’ virtues, with appropriate structures, processes, and behaviour. Social disciplines such as a sense of responsibility for and a desire to maintain good order, working logically, cooperatively, to plan — an ‘objective oriented, project management approach’ for individual and group gain — needs to be taught, ideally from the cradle, and reinforced in our activities, provided the connectivity and content are built to support this. These values can also be introduced at any level. Playing for group stakes and open, direct communication can be habituated through practice, by educational, economic and political systems treating them as worthy of inculcation and reward.

A necessary adjunct is to embrace long-horizon plans and group gains through multipartisan activity. For example, export initiatives are needed using digital technologies that feed into a digitally informed foreign trade policy (DIFTP).  Such initiatives require diligent collective effort, recognising that short cuts are at the cost of larger gains. Until we practice such convergent, national-gain behaviour, we are unlikely to generate the surpluses we wish for.

shyamponappa@gmail.com