Opinion India goes to towns

Let us place the report,and its demands,in context. This will be the ninth year running that India will grow above 8 per cent per annum (yes,I know,there was global recession in 2008-09 when the growth rate dipped to 6.7 per cent). Yet,many learned scholars keep arguing that India is overheating and should be “proud” to settle into the non-overheating zone at the earliest opportunity. Of course,they never specify what that non-overheating zone is — because that is not the concern. It is inflation,and if inflation is 6 per cent with a growth rate of 6 per cent,well then,we are overheating! But that is to assume that inflation and growth are twins separated at birth. An untenable,and even ridiculous,assumption.

The latest budget places infrastructure investment to be around Rs 12 trillion,or about 13 per cent of the total budget,or about a third of the investment budget. While the definition of infrastructure investments has changed,and will change,a one-third share was last seen in the 1980s. Infrastructure investments in general,and investments in urban areas in particular,are likely to increase much more than that envisioned by the Ahluwalia committee. So on that score,the forecast is likely to be in error,and an under-estimate. And with it the fears that unless this investment was forthcoming,Indian GDP growth of 8 per cent will be in jeopardy.

Besides this unrealistic under-estimate of future urban investments,the report is excellent and spot-on. The most urgent need in India is to face up to the forthcoming urbanisation problem. To date,India has been able to side-step this issue because its rate of urbanisation has been much slower than predicted. Figures just released for China indicate that their degree of urbanisation has increased from 36 per cent in 2000 to 50 per cent today. Admittedly,China is three times as rich as India,but urbanisation has to do with both the level of income and its rate of growth. And with the kind of growth rate India has been experiencing — and this without any economic reforms — one can only conjecture what will happen to urbanisation,and growth,once there is reform renewal.

While I have quibbled with the forecast of the level of urban investments,I must emphasise that the report is brilliant in its dissection of the past,and its recommendations for the future. The future is outlined in eight different areas — water,sanitation,roads etc. But one among several real contributions of the report is in its emphasis on financing.

This is a big,and welcome,departure for Indian policy. It indicates that the report-writers are well aware of the changing world and domestic order. Infrastructure is a public “good” but it does not mean that there has to be a strain on the central budget. Cities will develop,and their development will have to be increasingly self-financed. Hence,the very welcome discussion,and recommendations,about how municipalities (urban local bodies) will have to be developed,strengthened,and given the right to administer and collect “exclusive” taxes. This will involve changing the all-important nature and structure of property taxes in India. The report does not discuss it,but capital gains taxes for property also need a major reworking,and reduction. It is high time our tax administrators realised that both governance and revenue maximisation involve lower tax rates — alternatively,lack of tax collection,bribery,corruption,black-money generation all require high tax rates.

The Ahluwalia report rightly stresses reforms and governance. We have had precious few of these in the last decade,and certainly none since the growth spurt started in 2003-04. Does that mean reforms are not necessary? Just the opposite. Both to sustain this 8 per cent plus growth,and to increase it,reforms such as those suggested will be absolutely necessary.

One area of infrastructure where we have known what to do,as testified by the several committee reports (the latest being the Kirit Parikh 2010 report),is on the pricing of domestic oil products. But these reports have made little difference to the fact that in terms of oil (an important element of infrastructure) the Indian government,and especially the UPA,has followed one of the stupidest policies in the world. So why would the Ahluwalia report not suffer the same fate and why will stupidity not reign supreme? Because,like the slow pace of urbanisation,those days are gone. Governments and those who frame inappropriate policies have no place to hide.

I don’t want to end on a pessimistic note — it is not part of my DNA. But what ultimately proves worthwhile in the muddling through,but entertaining and exciting,society of ours,are studies like the infrastructure report. Most questions are discussed,analysed,and suggested paths outlined. If only India were to begin to listen. But it has! And at long last,even the UPA is beginning to recognise reality.

The author is Chairman of Oxus Investments,an emerging market advisory and fund management firm.