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INVESTMENT MODELS


Investment is a process of putting money in productive activities to earn income. It can be done directly (in different activities in the primary, secondary or tertiary sectors) or indirectly (as in financial securities, such as shares, debentures, bonds, mutual funds, etc.). In the case of India, ‘Investment Models’ are the means and tools by which the GoI has tried to mobilise required funds (resources) to promote the different goals of planned development. Since India started the planning process (1951), we see differing models being tried by the governments to mobilise resources—it has been a kind of ‘evolutionary’ process. We may understand them in the following ‘phases’.

Phase-I (1951—69)

This was the phase of ‘state-led’ development in which we see the GoI utilising every internal and external means to mobilise required resources. The main areas of resource allocations were for infrastructure and social sector. The famous Mahalanobis Plan gets implemented during this period. In this period, we see the whole financial system, tax system and fiscal policy of the country getting regulated to drive in maximum funds for the government to meet its planning related financial responsibilities.

This phase was marred by visible mismatches between the need and availability of investible fund—there always prevailed a lag between the requirement of funds and their mobilisation. Thus, investment targets of the government got derailed many times (war with China and a limited war with Pakistan also eroded and diverted the resource allocation mechanism). But overall, the government was able to start the process of industrialisation almost from nothing by mobilising heavy funds in favour of the infrastructure sector and infrastructure industries (the core sector)—education, health care also got funds but in a subdued manner as the GoI remained greatly preoccupied with ‘glorification of the public sector’. This was the age when GoI used to consider the PSUs as the ‘temples of modern India’.


Phase-II (1970—73)

With the enactment of the Industrial Policy of 1970 we see GoI deciding infavour of including ‘private capital’ in the process of planned development

—but not in a big and open way. The idea of ‘Joint Sector’ comes under which a combination of partners—Centre, state and private sector—could enter the industrial sector. This was done basically, to make private sector come up in areas which were open for them, but due to certain technical and financial reasons they were not able to take part. In due course of time the government did quit such ventures and such industrial settlements came under complete private control.

This is for the first time we see the government inclining on private funding for planned development, but we do not see any private entry in the GoI’s monopoly areas of industrial activities (which takes place only after the

reform process begins in 1991).


Phase-III (1974–90)

With the enactment of the FERA in 1974 we see the government, for the first time, proposing to take the help of ‘foreign capital’ in the process of planned development—but not via cash foreign investment—only through the ‘technology transfer’ route that too up to only 26 per cent of the total project value proposed by the private sector. Basically, under FERA government tightened the flow of foreign currency inflow into the Indian private sector, which started hampering the technological upgradation process and initiation of the state-of-the-art technologies from the world—the technology transfer route was put in place to fill this gap. It means that even if GoI tried to include foreign investment in the developmental process its entry remained restricted in two ways:

(i) It was not either ‘direct’ (as we see FDI during the reform process) or ‘indirect’ (as the PIS ), but via technology transfer.

(ii) Foreign entities could enter only those industrial areas which were open for the Indian private sector (under Schedule B of the Industrial Policy Resolution, 1956). The ‘monopoly’ industries under GoI (some of the most attractive industries for the private sector) remained closed for entry.

It also means, that India failed to articulate an investment model which could tap the better elements of the foreign capital—state-of-the-art technologies, better work culture and most importantly, scarce investible capital. Experts believe it as a missed opportunity for India. By 1965–66, the South East Asian economies like Malaysia, Indonesia, Thailand and South Korea had opened up their economies for both forms of foreign investments

—direct as well as indirect—and the governments there ‘decontrolled’ the industrial sectors, which were earlier fully under government controls (it should be noted here that these economies had started exactly the same way as India had started after Independence). This gave those economies a chance to tap not only scarce investible fund into their economies, but the state-of- the-art technologies from the world and world class work culture and entrepreneurship, too. Soon these economies came to be known as the Asian

Tigers.

The period after 1985 saw dynamism in the area of resource moblisation— two consecutive Planning Commissions suggested for opening up of the economy and inclusion of the Indian and foreign private capital in industrial areas which were hitherto reserved for the government. It suggested that GoI to withdraw from areas where the private sector was capable and fit to function (for example, infrastructure sector) and concentrate on areas where private sector would not be interested to operate (for example, the social sector). In a sense, during this time, we see an ideological shift in the government towards giving an ‘active’ or ‘central’ role to the private sector in the process of economic development. This was an advice for a completely different kind of investment model. But due to lack of political will, the governments of the time could not go in for the same. Though, we find the govenrment going for a kind of limited degree of economic reforms through the Industrial Policies of 1985 and 1986 (this should not be taken as Economic Reforms in India which officially starts in 1991 only).

As a summary of the investment models up to 1990, we can highlight the following points.

(i) Government remains the main investor in the economy and experts believe that India did undue delay in putting in place an investment model by which the potential of the private sector could be channelised into the process of developmental investment.

(ii) Emphasis on the public sector continued together with nationalisation drives also by late 1960s and early 1980s (the PSUs, to a large extent, were privatised by the South East Asian economies by now, making these socially-oriented and loss-making units to catapult into hubs of profit and real drivers of growth and development).

(iii) Tax system was structured to raise maximum tax revenue (which led to tax evasion and excessive tax burdens on the citizens).

(iv) GoI continued cutting its non-plan expenditures so that resources could be allocated for the purpose of planned development (which led to expenditure cuts even in essential areas like education, health care, etc.).

(v) Excessive government dependence on the financial system continued ‘crowding out’ funds, and as a result, the private sector could not

mobilise suitable levels of funds for their requirements.

(vi) Technological upgradation and initiation of new technologies into the economy got hampered due to non-availability of foreign currency to the private sector (GoI, by late 1970, started facing the difficulty of paying its external liabilities, which were mainly created due to the expansion of the PSUs).

(vii) Main sources of fund in this model were, government’s tax revenue, internal borrowings, external borrowings and the freshly printed currencies.

There always prevailed a lag between the requirement of funds and their mobilisation resulting into government investment targets getting derailed most of the times. In the meanwhile, the biggest crisis was building-up in the areas of infrastructure shortcomings. By early 1960s itself the Indian private sector was eager to enter this sector so that adequate levels of infrastructure could be developed. But due to several reasons we see the GoI continuing as the monopoliser in these sectors.


Phase-IV (1991 onward)

Due to prolonged follow-up of weak fundamentals of economics and immediated after Gulf War-I, India headed for a severe Balance of Payment crisis by late 1980s, which made India go to the IMF for financial help. It comes up but at some ‘conditions’—the design of the ‘conditions’ made India to go for a ‘restructuring’ of the economy under the process of economic reforms commencing in 1991.

Reform era shifted India towards including the ‘private sector’ (domestic as well as foreign) for the future development of the economy—and here comes a different investment model. Main elements of this investment model are as given below.

1. The hitherto monopoly sectors of the industry were opened up for private investment—barring Nuclear Research, Nuclear power and Railways (latter two areas are partially opened)—in all of them direct foreign investments have also been allowed (between 26 to 100 per cent). We see the ‘investment model’ for ‘infrastructure sector’ shifting from

‘government-led’ to ‘private-led’.

2. In coming times, GoI articulated the idea of the Public Private Partnership (PPP) model of investment for this sector, to provide confidence and space to the private sector to enter the sectors (as the private sector was not much interested to participate due to some inter-related problems in the sector, for example lack of ‘market reforms’). By the 10th Plan we see private sector putting in around 21 per cent of funds required for the infrastructure projects in the PPP mode which increased up to 32 per cent by the 11th Plan. On the basis of past two plans the PC projected that private sector will put in around 50 per cent (48 per cent, to be precise) of the funds required for infrastructure development during the 12th Plan (which could not be achieved due to several internal and external reasons till 2015). Here, one point should not be missed that in future the infrastructure sector is to be fully handled by the private sector—as per the idea of the reform process.

3. In 2002, the government, articulated the idea of PPP (Public-Private- People-Partnership) through the 10th Plan (2002–07). The idea has its use at the local level where the resources are to be mobilised for the creation of physical and social infrastructure. It was launched in watershed management successfully. Gujarat had shown highly successful model of this investment in its ‘Pani Panchayat’.

4. To support the private sector to mobilise their share of fund in the infrastructure PPP, the government has set up the Infrastructure Development Fund, which also has provision for the Viability Gap Funding (VGF).

5. Inside the general idea of PPP, the government has also put in place some other options of investment models, such as BOT (Build-Opetare- Transfer); BOO (Build-Own-Operate); BOOT (Build-Own-Operate- Transfer); BLT (Build-Lease-Transfer); BOLT (Build Operate-Lease- Transfer); DBFO (Design-Build-Finance-Operate); DBOT (DesignBuild-Operate-Transfer); DCMF (Design-Construct-Manage- Finance); etc.

6. In the area of mobilising resources for the expansion of the Social Sector,

we see an increased focus coming from the governments. But the

government still thinks inadequacy of funds for the proper and timely development of the sector. Thus, by 2012, the GoI proposed plans to include the participation of private sector in the sector, mainly, education and health care through the PPP mode, which is still to be formally launched. Meanwhile, the provision regarding corporate social responsibilty (CSR) via the Companies Act, 2013, some additional funds have started flowing to the fund-starved social sector. By early 2015, the government has asked the PSUs to flow their part of the CSR expenditures to the GoI for the newly launched sanitation drive, the Swachch Bharat Abhiyan.

7. So that the corporate sector is able to mobilise enough resources for its investment needs in the economy, the governments started to restructure the whole gamut of the tax structure, financial structure and its fiscal policy. Now, as the economy will depend more on private participation for its developmental requirements, the government avoid crowding out the fund from the economy—a process of fiscal consolidation starts in. An increased emphasis comes on the fronts of ‘targeting’ the subsidies, their better delivery, pension reforms, etc., so that the government could de-burden the financial system from its fund requirements and enough finance flows in the system for the private sector.

8. To take care of the spending and investment requirements of the general public, the government is committed to put in place a cheap interest rate regime, right kind of financial environment, an stable inflation and exchange rate besides other instruments. Bringing in ‘inclusiveness’ in the growth process is now the declared policy stance of the government.

9. Once the new government came to power by mid-2014, we find a renewed synergy in creating conducive environment for the private sector so that the economy could be able to attract enough investible fund to further the process of development. The government looks committed to the cause of improving the ‘ease of doing business’ in the country. Aimed to this we find the government busy in putting in place the ‘right’ kind of land acquisition law, labour law, companies law, tax laws, digitalisation of government processes, etc.

Overall, the current investment model of the economy is private-led and

for this the GoI proposes to put in place the right kind of financial system, legal framework, labour laws, etc. The main idea of this model is to ‘unshackle’ the hidden potential of the private sector. To the extent the role of the government is concerned, it will be limited to being a regulator with an increased tone of a “facilitator” and a caretaker of the well being of the disadvantaged and marginalised sections of the society, so that the face of the economic reform remains ‘humane’. In wake of the financial crisis in the western economies, the challenge of mobilising resourecs has become tougher and it will be really good that the government is able to devise out a working investment model.