Can We Stall Disinvestment Further?

...nice article mr. khan....divestment is caught up in politics as everything else is in india...how do we make progress on anything when we effectively need a billion people to agree on everything?...sometimes democracy makes doing anything painful...but the alternative is worse, so we must live with it...divestment will happen in fits and starts...the credit ratings will bounce up and down...on average the trendline will point upward, as long as the clowns running the government can maintain some political stability...indian enterprise and technical talent will take care of the rest...

Undoubtedly an excellent article. However, it is amazing that last year`s downgrade in S&P and Moody sovereign ratings did not do much to affect foreign direct investment, which in fact reached record highs in `02. Forex reserves in October `01 totalled $44 billion, and this year $58 billion...this reflects the impressive work of the RBI and maturity of the Indian forex markets. Perhaps it will be recreated the coming year as well.

If I remember rightly, at the time of the 1991 crisis, India took upon itself the full burden rather than default on any loan obligation, and met all its obligations on their respective due dates. Is India in a condition to fulfil its obligations in fiscal 2002-2003? Gujurat earthquake, UTI payment crisis, Indian Parliament attacks.. what next. BTW, if we see a leap in oil prices, will India`s forex reserves be sufficient to fight the crisis?

Wish we could see a GDP of more than 7% and economic growth that would be the pride of Asia. Maybe some day.

A timely, well-written article. The public sector was a worthy cause once upon a time. Now, we ought to thank Nehru for all he did, and get out of these inefficient entanglements.

Can we divest quickly enough to achieve our potential? I am not very hopeful.

We are doomed to making a slow progress - much slower than our abilities actually entitle us. When everybody thinks of himself or herself as a king or a queen, nothing can happen very quickly.

Khan,

I wonder what kind of economics you teach. Most of the indian soveregn debt is either bilateral or multilateral and has nothing much to do with the rating agencies. Hardly any company in india borrows in the world open market. Indian saving rate is more than 20 percent while say that of US is less than 1 percent. There is enough of rupees to go around.

Divestment is good only to improve efficiency in the public sector, not to improve the credit rating. Crdit rating has next to zilc effect on the indian economy.

Re: Article
Thank you Mr. Khan for a wonderful and timely article. There is no gainsaying that we just have to sell our white elephants. No one denies that it’s a need and we have some $40 billion tied in these institutions and we spend money to keep them alive. But selling them has its own challenges. United Airways has 40 employees per aircraft. Air India has 8000 per aircraft. The buyer will have to retrench most of these employees to be profitable. It’s the same story with the other public sectors. This as we all know is not easy in India.

Regards,

Faruk

Jay # 5
What you are saying has merit, but remember that international trade will rise from 2% of our GDP to about 7 % in the next five years. India needs to be very weary of International credit rating far various reasons. For one we have 21 companies listed on the Nasdaq right now, we will have probably 10 times as many listed in the next five to 10 years.
We need large amounts of expenditure in infrastructure roads, power plants, dams and you name it. Its imperative that we attract foreign investment in these areas and whoever invests in these areas will have to borrow money.
A lot of multinational companies are looking at India as a site for not only offshore software development but a site for the entire back office, financial services, health management services, HR, pay roll etc. These firms look at the credit rating of a nation to avoid a south America like situation,
We have to bring down the deficit to below 5% of GDP and create a environment that enables our business to borrow money cheaply. We have to be the most attractive place to invest from all accounts to achieve a growth rate of 8%.

Regards,

Faruk

Good article. I don`t want to defend the indefensible which is the sacred cow (or milch cow whichever way you want to look at it) of the politicians viz. the public sector and subsidies. However, I think we should also be wary of the rating agencies. Remember how they encouraged the Asean nations to float their currencies and when the bottom fell out, tons of money was made on arbitrage. India, like China, were not affected because currency was not floated.

One other thing to point out. Bad as it may sound, we need to spend to bring development to underdeveloped areas out of the public coffers, else we are looking at a lot of instability as manifested in states like Bihar. The trick is to get it to go to the right areas and make a difference, which is easier said than done.

India, like China, has critical mass to become an economic power in it`s own right because of sheer size and population if pragmatic economic policies are followed. Rating agency advice should be studied carefully, debated and acted upon with caution but should not be construed as pearls of wisdom dropping from the heavens.

Welcome to Chowk, Mr Khan.

It is interesting to read that 80% of the defence budget goes into paying salaries and pensions. That means there is not much flexibility in reducing defence expenditure without downsizing the forces.

Does anyone have similar figures for other countries? Since defence expenditure is ``unproductive`` expenditure, is there any way to free up that capital for investment purposes?

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Stuka

``Does anyone have similar figures for other countries? Since defence expenditure is ``unproductive`` expenditure, is there any way to free up that capital for investment purposes?
``

It is very easy and a simple search on the google will give you the relevant data. From my own knowledge(memory), I can say that the defense expenditures of India recently reached around 2.7%-3% of GDP. The total annual defense expenditure of India is around $13-$14 bn as of now and the latest Indian GDP is around $470 bn. Thus the percentage of GDP expenditure of India is moderate when compared with the other countries of the world(2.5% to 3% GDP on average) and definitely not on the higher side. Just to put the matter in proper perspective Pak`s real defense expenditure is aroud #3bn to $4 bn(though officially they claim it to be slightly lower than $3 bn) which is roughly around 5% of their GDP(Pak GDP: $62 bn) or higher.

PS No, there is no easy way to ``free up`` this capital for investment unless most of the defense manufacturing is done in-house. For example if you decide to place the order for buying 200 jets with an Indian company, the defense budget remains inside the country and increases purchasing power of people by providing employment and thereby stengthening economy by virtue of ``multiplier effect``.

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Countries like India and Pakistan are facing huge economical problems due to their own stubbornness. If India and Pakistan cut down their defence spendings, I guess, economic management (and life of common man) will become quite easier. But, the hatred in the heart against each other is so deep-rooted, that only a miracle can change the attitude of the two countries. So, lets live with these circumstances.....