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India needs minister for investment; a technocrat to fix turmoil in finance

The government must find an investment czar, who will boldly open doors to American and Japanese finance

Andy Mukherjee | Bloomberg  |  New Delhi 

Even though the equity market was opened up for foreign investors immediately after the early 1990s, the norms for foreign investment in debt were released in 1995 and in 1997, Rs 29 crore trickled in
A minister of investment could at least get it going in the five-year window the next government will enjoy

India needs a minister for Whoever wins the May 23 election count, the next government must find somebody who will boldly open the doors to American and Japanese capital.

Another statist intervention in a country that labors under an excess of bureaucracy might not look like much of a solution to anything. But for India to break free from the lower-middle-income trap will require officials to marshal and allocate every scrap of funds prudently, and correct mistakes swiftly.

Just having a minister of finance isn’t enough, as India’s own experience has shown. From power and airlines to and lending, large Indian businesses are failing at an alarming rate. But providers of capital — whether banks or capital-market — haven’t a clue about how to recover anything.

It’s time for a technocrat to step in to deal with stressed investments, with the finance minister’s portfolio truncated to broader macroeconomic and fiscal policy.

Financial services, including banking, insurance, pensions and capital markets, are currently a department within the ministry. Since September, the department’s website has featured nothing but personnel moves under its “What’s new” section, of the “director XYZ appointed to/removed from state-run institution ABC” type.

A Long, Painful Crunch

Meanwhile, consider all the turmoil in India since September. The IL&FS Group, a vaunted infrastructure operator-financier, has gone bust with $12.8 billion in debt, casting a pall over wholesale funding markets. Jet Airways India Ltd., the country’s oldest private-sector carrier, has $1 billion in net borrowings and has stopped flying, while tycoon Anil Ambani has given up trying to repay $7 billion to creditors of his firm by cutting deals outside of courts.

Now Ambani is beset by a new problem: a liquidity crunch and ratings downgrades at Ltd., another of his main businesses. Reliance Home Finance Ltd., a unit, recently missed some debt payments. The trouble brewing in India’s shadow-banking world is the most scary of the country’s problems because it threatens to boomerang on both the ultimate users of funds (the construction industry, in particular) and their original providers (banks and mutual funds).

If nothing else, the new minister will have to intervene in the shadow-banking crisis to ensure half-completed buildings get finished and sold. India’s law is unable to do this. The outsiders trying to liquidate IL&FS at the state’s behest aren’t having much luck either. The government has to be in the driver’s seat, though not to write checks with taxpayers’ money.

A former central bank governor’s effort to push through a much-needed resolution process was abruptly curbed by the courts last month. A minister of could outline a novel solution, and the bureaucracy would have to find a law — among the dozens it oversees — to lend it legitimacy. Finding the missing legal space to act is the government’s job.

Foreign capital presents the most elegant solution for recapitalization, but rather than asking for their money directly, a risky experiment is underway to take it indirectly. The monetary authority is nudging cash-strapped financial firms to borrow dollars oversees, bring them onshore and get them swapped cheaply for rupees by the central bank.

All it would take is for the new minister to say, “Why should we borrow investors’ dollars for three years when the likes of want to buy our stressed businesses instead? Why shield our businessmen from the consequences of their failures?”

The Hard Slog Ahead

Foreigners won’t stay forever. Once India Inc. recovers its footing, it will want to buy back assets it’s been forced to sell. Today’s local entrepreneurs may not want to pay the premiums that an American buyout firm or a Japanese insurer will eventually demand, but a new generation might. Some movement in India’s billionaires list wouldn’t be a bad thing.

Beating the lower-middle-income trap was relatively easy for because the People’s Republic, in the famous words of its reformist leader Deng Xiaoping, didn’t care if the policy cat was black or white. Beijing’s challenge is now the upper-middle-class barrier. 2 To cross it and become rich will require to innovate and accumulate intellectual property. New Delhi’s priority, however, should still be to boost the health and education of its workers, and the efficiency of capital.

It’s a long game, but a minister of could at least get it going in the five-year window the next government will enjoy.

First Published: Sun, May 05 2019. 08:32 IST