The state withers?

Last week's report in this newspaper described how investment activity is being increasingly dominated by the private sector. Analysing the capex numbers for over 1,700 listed companies, which includes all the major listed public enterprises, it found that the share of total capex by the public sector companies came down from over 33 per cent in 2001-02 to about 25 per cent in 2005-06. Domestic private companies increased their share from a little below 60 per cent to over 70 per cent during the period, while international firms operating in the country saw their share drop from about 7.5 per cent to a little over 4 per cent. Of course, these numbers do not capture the entire public investment picture, as a lot of it happens through non-corporate or unlisted entities. But even when the aggregates provided by the National Accounts Statistics are considered, public investment displays a declining trend. During the five-year period 2000-05, it averaged 7 per cent of GDP, compared with 9.4 per cent and 7.3 per cent in the two preceding five-year periods. All indications are that domestic investment is swinging firmly away from the public to the private realm. This has both positive and negative consequences.

On the positive side, it signals the withdrawal of government from the economic activities that are carried out with greater efficiency by private enterprise. The ultimate beneficiary of this swing is the average consumer. As long as s/he gets good value for money from private producers, who live and die by their competitive strengths and weaknesses, public provision should not really be required; the state has more important things to focus its energies on. As incomes increase and more and more people enter the "consuming" classes, servicing their needs can be increasingly left to the private sector. Both wittingly and unwittingly, the state has conceded this point and has limited the expansion of capacity in sectors that are essentially competitive and well-served by the private sector. One would imagine then, that the investible resources that the state has command over are used in areas that the private sector would be wary of entering.

Unfortunately, as the aggregate numbers suggest and everyday experience rubs in, this has not been the case. Government resources have been largely consumed by servicing accumulated debt and meeting salary expenses, with little capacity being added to an increasingly overstretched system. There are sectors in which the absence of public investment is really hurting the economy. While private resources can theoretically substitute for public ones in some of these, they need an enabling environment to do so. When that environment is found, the most striking case being telecom, the results can be spectacular. But, as in power or many of the transport sectors, creating the right conditions can be a painful and unpredictable process. It is here as well as in agriculture (think irrigation) that declining public investment hurts most, both in terms of immediate quality of life and by constraining the room for further investment by the private sector. One aspect of this, which has recently received a lot of attention, is the sharp increase in outward foreign direct investment by Indian companies. Globalisation strategies aside, one reason why Indian companies are looking for opportunities abroad""now that there are no forex constraints left""is to offset the disadvantages inherent in the domestic investment climate. A swing from public to private also induces a swing from domestic to foreign.