Looking at 2019 and beyond
Reinvigorating investment policy will ensure sustainable progress in augmenting India’s economic performance
Given the current economic situation in India, it would be prudent to have our eyes on the pressing issues that need the attention of the government over the next six years. Policy changes, new policies and an environment that facilitates investment will be vital.
The recent renewable energy auctions, which failed to attract significant bids, bring to the fore the crucial question around price caps. While providing low-cost electricity is essential, so is a sustainable power sector. The issue that merits more debate is whether a free-pricing market with a regulator that ensures no cartels are formed is a better solution in the long run than price caps.
This argument applies not only to renewable energy but all sectors. Investors in any sector face variable dynamics across a variety of factors ranging from input prices, credit costs, research and development costs, and foreign exchange risk. "Pricing" of a product or a service needs to consider all that goes into making or producing the product.
To give an example, drug pricing for a patented drug involves significant research and development costs. Therefore, the price of a drug needs to factor in a fair amount of analysis to determine the price over and above raw materials.
Similarly, for other sectors, it is vital that the rapid pace of growth and expansion can continue so that risk-taking businesses can get rewarded adequately. Extreme measures to control prices can lead to sector problems, thereby discouraging investments and research. Therefore, over the next few years, it is essential to strike a balance between low-cost products and services, and sustainable industry dynamics.
In the financial markets, India needs to further embrace mark-to-market valuations in the corners of the market that still utilise hold-to-maturity accounting. Banks hold certain financial instruments as hold-to-maturity from a regulatory perspective. Besides these instruments, the quicker the rest of the fixed income product universe moves towards mark-to-market regulations the more robust a capital market India will have.
While increased mark-to-market regulations might lead to an initial slowdown in the bond markets, the long-term benefits of a transparent credit pricing market far outweigh any short-term costs. The most significant advantage of stringent mark-to-market regulations will be the ability of market prices to be a better indicator of the credit risk of products, thereby encouraging effective risk management by investors and financial institutions alike.
Divestment of government assets to create new infrastructure will be crucial. The recent decision to approve the divestment of the government's stake in the Dredging Corporation of India and the in-principle approval of the PPP model for six airports is a step in the right direction. However, to deliver valuable infrastructure, the government must ensure that non-tax revenue is used to develop infrastructure in the specific sectors where the divestment occurs, or the PPP happens. Enabling infrastructure creation that is industry-specific regarding both the divestment or partnership and in creating new assets will add significant value.
The agriculture sector will require focus with renewed vigour over and above minimum support prices and farm loan waivers. The sector is vital not just to improve a lot of farmers (who are at the riskiest end of the farm-to-fork model) but also to create avenues to feed a sizeable consuming population. The farm-to-fork model is much spoken about and needs a step-wise approach to succeed in the long-run.
A good start would be to choose sub-sectors within agriculture that are amenable to a farm-to-fork model so as to create a "model template". A farm-to-fork model would involve procuring the original product, processing, storage and transportation, and merchandising the product. Choosing the low-hanging fruit to create templates will help expedite the process. More importantly, user-cases will help spot the gaps within the agricultural supply chain.
Government policies that create an effective pricing environment and avenues for revenue generation to enable investment and infrastructure will be crucial going forward. More importantly, long-term sustainable growth will require a balanced approach to help promote a broad spectrum of sectors such as energy, finance, and agriculture.
(The author heads Development Tracks, an infrastructure advisory firm. The views expressed are strictly personal)