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Rediff.com  » Business » Why opening up the economy is good for India

Why opening up the economy is good for India

By T N Ninan
January 06, 2007 16:34 IST
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DLF's formidable land-bank, and the humongous stock market valuation that it is shooting for with its public offer of shares, underline two key elements of India's economic resurgence.

One is that new areas of business are being opened up all the time for large, private enterprise, and this is creating economic activity and new wealth on a dramatic scale. It would have been hard to imagine even a few years ago that an old-fashioned activity like real estate development (reserved in the big cities for public sector bodies--who mostly wasted their charter) could be such an enormous engine of growth if the private sector were allowed a foot in.

What this suggests is that the more the government opens up for private initiative in the organised sector, the faster and greater will be the economic activity, and wealth, that is generated.

It is possible, therefore, that decisions taken in the last few weeks with regard to two other previously unfashionable sectors, will repeat this story--in retailing and containerised rail transport. The big boys are all rushing into retailing and talking of investments in billions of dollars; and no fewer than 14 companies have already announced their entry into containerised freight movement.

That could develop into another big business, and someday someone is going to be India's freight king. More importantly, the development of these businesses will bring about system-wide efficiency improvements, as also create export possibilities--agri-exports could finally take off as people work out cold chains and efficient supply linkages.

It is a plausible argument that India's economic momentum is being sustained in part by the government opening up sector after sector in a steady if somewhat slow sequence. The previous round of market opening (about three years ago) was in civil aviation, leading first to the birth of low-cost airlines and then to the privatisation of airports and significant investment in the air transport infrastructure, including hundreds of new planes.

If the electricity law of 2003 is allowed to be implemented, and the restrictions on the private sector's role in the power sector (not just generation, but distribution and trading) are removed, we could see another burst of investment and the growth of yet another sizeable business.

Certainly, the opening up of exploration and development in the oil and gas sector has led to not just an improvement in energy security but the deepening and broadening of India's energy sector--more companies in the fray, new discoveries, gas pipelines being laid across the country, piped gas in cities, and much else.

If mining is now thrown open to private prospecting and then exploitation of reserves, there can be no doubt that it will attract some of the biggest companies in the world, and a lot of investment.

If none of the opening up had happened, and all these sectors had been left to the state-owned or unorganised sectors, it is a safe bet that both the investment and the market expansion will not have happened on the scale that they have--the telecom story makes the point most effectively.

Government investment, if financed through the budget, would have led to an explosion of the deficit and increased macro-economic risks. If done through state-owned enterprise, some would have succeeded and others would have failed, but (as in the past) there would have been no systemic way of separating the wheat from the chaff, and the results would probably have been sub-optimal.

Either way, the country would not have enjoyed the market expansion that is in evidence in all these sectors--and India's capital market would not have been deepened and broadened as has been done. Indeed, although state-owned companies continue to dominate India's financial sector, the birth and growth of private banks, insurance companies and fund managers has definitely added dynamism and momentum to the whole sector.

Equally important is what the new businesses have done to the job market, and the opportunities that have been thrown up for youngsters. The moral of the story for the government is the obvious one: the critics of opening up are wrong, and allowing the private sector in more and more areas strengthens the system.

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T N Ninan
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