Capital includes money and means of production (including the infrastructure needed to get the products to the market). This is the low hanging fruit.
Let’s start with money capital in which India is starved and therefore needs to open up FDI more. I applauded when the FIPB (which had morphed into the Foreign Investment Prevention Board in practice rather than the promotion board it was supposed to be) was abolished. The debt markets need to be opened up for FDI.
PSU’s should only be in sectors where the risks are too high for private entrepreneurs to bear. The government has no business being in business and is a very poor manager of scarce capital. It is obvious from the experience of Air India , BSNL or PSU banks, that government managers just cannot compete on a level playing field with private entrepreneurs and the capital being burned (either through direct losses or because of very low returns) should be better used to create a safety net for citizens and their health, education and safety and to invest in infrastructure.
India has over the last decade created a pretty reasonable power, telecom and roads infrastructure and slowly the ports infrastructure is getting better but a lot more capital is required there. Lack of land availability and poor contracts and poor government support is still a huge issue. Railways is a big bottleneck and the cheapest form of transport is hugely under- utilised compared to its potential. The railway infrastructure (tracks / signalling etc) has to be delinked from the service and private enterprise needs to be brought here to create some competition and dynamism.
India is still a banking (as opposed to debt market) driven market and a majority of the banking sector is still dominated by PSU banks who do a terrible job of lending. They need to be privatised.
The real cost of capital is still very high in India due to among other things the crowding out effect of government borrowings and the lack of openness to FDI for the debt markets.
It is my strong belief that if the GST and income taxes were simple to administer with lower rates and the government got out of business of all kinds, it would create surplus which could be used to fund the social safety , educational and health programs and infrastructure that are needed.
To be continued….Final article: summary and specific 10 point agenda to get India back to a structural 8% growth link to final article in series