Hopes and fears

Two recent news reports have presented the promise and the malaise surrounding the state of India’s industrial economy. On Tuesday, credit rating agency Moody’s Investors Service lowered India’s growth forecast to 7 percent for 2015, from 7.5 percent projected earlier, citing monsoon concerns and cautioned that further risks to growth stems from slow pace of reforms. However, the rating agency also said that India’s growth outlook seemed resilient beyond short-term monsoon effects, with the growth forecast for 2016 set at 7.5 per cent. Meanwhile, the Centre announced the proposal to create $75 billion-fund jointly between India and the UAE to fill the wide funding gap in India’s infrastructure sector. This announcement was seen as a major victory of Prime Minister Narendra Modi’s recently concluded visit to the Gulf nation. Our public sector banks are in disarray and the government seems focused on balancing the books for the being. As a result, the Centre lacks the fiscal capacity to spend large sums on big-ticket infrastructure projects, with the private sector reluctant to spend. 

Therefore, the Centre and various state governments are in desperate need of foreign money to develop India’s long-neglected infrastructure sector. What’s more, events in the recent past have shown us that huge commitments for foreign investments have rarely translated into action on the ground. 

Suffice to say, foreign investors, like their Indian counterparts, tend to assess the ground realities and seek the potential of a higher return before they spend their money. According to a recent study by rating agency CARE, in the last five years, only 8.4 percent of the funds proposed by foreign investors have been spent across 11,784 projects in the country. Moreover, India has witnessed a gradual slowdown in the proposed amount and number of investments over the last five years. The proposed amount of investments has been declining from Rs 15.4 lakh crore in 2011 to Rs 4.05 lakh crore in 2014 and finally Rs 1.5 lakh crore for the five half of 2015. According to data from the Centre for Monitoring India Economy (CMIE), an independent economic think-tank, the number of project announced in the first quarter of the current fiscal has gone down by 53 percent compared with the previous quarter. 

The problem continues to lie in the domain of bureaucratic red <g data-gr-id="34">tape,</g> since environmental clearances are hard to come by. Basic economic rationale tells us that when big-ticket infrastructure projects are delayed, the companies involved suffer cost overruns. Rising costs and no returns on their investment further creates an environment where companies are unable to repay large sums borrowed from banks, eventually forcing them to seek a restructuring of their loans. In fact, if one took a look at restructured loan portfolios under various public sector banks, the largest share goes to infrastructure projects. With the banks shortchanged for capital, the number of fresh investment projects too dwindles. 

The failure to pass key legislation through Parliament, especially the land acquisition and goods and services tax bills, has also dampened the mood among investors. On the land acquisition bill, the Centre was thoroughly cornered by opposition parties and its own political aspirations. It has now reverted back to the UPA’s version of the bill, which investors had deemed to be too restrictive. Finally, constant U-turns on taxation rules and judicial interference in executive decisions have further dampened investor sentiments. Investors seek stability and certain coherence in the implementation of the laws. Instead of celebrating the newly proposed fund, its time the Modi government found a way to solve this current impasse.