Explanation:
Incremental Capital Output Ratio (ICOR) shows how efficiently you are using capital in a country. Until a few years ago, the ICOR in India was as high as 4, meaning that it will take four units of capital to produce one unit of output. As of yesterday, it was 3.6.
Investment in India has been around $2.5-4 billion in the last two years compared to at least $25 billion in China. China is growing around 9% and India is growing around 6%. With 1/10 of China’s investment, how can India continue to grow at this pace? Some have concluded that China has become less efficient. If India has to grow at 9% it would need 36% investment. India’s saving rate is only at 25% now so it does need outside investment and that is why the government is compelled to continue with market friendly policies.
On the other hand, there is a viewpoint that the Chinese government is saying they are flush in investment, but this is only in a few sectors and in a few cities and this has caused them to become inefficient in those areas. They need to drive the investment into other provinces.
What you have now is 10 years of the first generation of reform leading up to 2000 resulting in an economy that is much more open, restrictions on the operations of the private sector have mostly been removed, and the number of licenses and requirements have been simplified. The fact that the economy is exporting more in one month than it used to in a year shows that this is happening.
In the second generation of reforms, the federal government realized it had a number of disincentives for province level exports. One of these was that when an entity from an individual, province-owned enterprise exported something, the revenue would go to the federal government and then the federal government would distribute this to the provinces based on need and merit. So there was no incentive for province-owned companies to export. This has changed. The federal government now wants to nurture a big brother relationship but essentially as a way to delegate more decisional latitude to the provincial government.
The central government has also started working on major projects. For example, most analysts believe that if India would fix its infrastructure problems the GDP would grow by at least 2%. Power structure reforms alone could grow it by 1 to 1-1/2 %. The central government has laid out in its financial for the next 20 years, and are planning half a trillion dollars in investment in infrastructure development. Typically, the problem in infrastructure in the last ten years is that return on investment is low and takes a long time to mature. The government has realized that it must have at least a 25% stake in each of the infrastructure projects to ensure domestic and foreign investors that the project will go forward. They have a series of programs. One on the highway side is BOLT (Build On Lease Transfer) in which they are incentivizing foreign companies to invest in roadways and then they can make them toll roads to recover their investment. Civilian aviation, ports, and electricity have also been the subject of these kinds of deals.
The World Bank, which had almost ceased lending to India 4 or 5 years ago, came back this year and said they not only wanted to resume investments but also wanted to increase them, to the total amount of $3.5 billion, particularly in infrastructure. The federal government has said do not give the money to us, it should be given directly to the projects that are going on and do it in installments based on the World Bank conditions as the project is successfully completed. An example is the building of the national highway system. The government calculates how much of the highway is passing through each district. To the district magistrate (bureaucrat) they are given identical specifications and then telling them to invite tenders and build their part of the highway. This was a way to allow the building of the system without starting at one point and working to the end. It allows the simultaneous building of the system. Quality tests are done to ensure that it is all of the same quality.
