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Need to pep up investment

As the nation is on the cusp of a change at the helms of administration with the outcome of the poll after mid-May throwing up any odd combination of political parties to rule the country for the next five years, the biggest challenge confronting the economy is how to get investment activities kick-started. It is common knowledge that for more than five years, investment activities, both public and private, had not been on course but was in moribund state due to a medley of factors. Mostly these were self-made by the UPA government that had been in the saddle for two stints in a row but wasted away chances for action and development in a reckless pursuit of rights-based entitlement and welfare programmes most of which suffered grievous leakage for want of purposeful and targeted focus on the needy and the deserved.

In his last media interaction at the AICC headquarters in the capital on the economy he had inherited and the legacy he was leaving, the Union Finance Minister P Chidambaram characterised the penultimate year of UPA-I 2007-2008 as the ‘most outstanding year in India’s history in terms of economic performance’. He also reeled out a raft of data to substantiate his claims on this count, adding in particular that investment to GDP (gross domestic product) ratio was the highest at 38.1 per cent and the GDP growth was the highest at 9.3 per cent. No doubt, the subsequent global financial meltdown partly put paid to the torrid pace of growth by India. But the fact that most of the scams such as the Commonwealth Games, Adarsh Housing Society, coal, spectrum allocation (2-G) that tumbled out of the ruling party’s cupboards after 2009 with the Comptroller and Auditor General of India (CAG) and other public policy surveillance bodies including the apex court of the land taking a stringent view of the ubiquitous venality that smacks of crony capitalism at its worst, the economy did grind to a galling halt.

A more cautious bureaucracy which had in some cases been indicted for not being able to withstand the intense political pressure brought to bear on it to take wrong decisions or abet in the shenanigans and shady projects of dubious nature preferred to remain somnolent instead of taking any action even on normal matters, leave alone issues of important and high financial implications. The resultant drift with no solid intervention from the governing coalition on its own volitions has landed the country where it has been so for the past three years of dismal and insipid economic growth.

A recent working paper by the economists of the International Monetary Fund (IMF) Rahul Anand and Volodymyr Tulin titled ‘disentangling India’s investment slowdown’ and using the new measure of economic policy uncertainty contended that heightened uncertainty and deteriorating business confidence have played a key part in the recent investment slowdown. It said the marked acceleration in economic growth witnessed in years preceding the global financial crisis in India was tied to a surge in investment activity. Gross fixed investments as a share of GDP rose from an average of about 24 per cent during 1996-1997 to 2003-2004 (the United Front and the National Democratic Alliance regime) to a peak of nearly 34 per cent in the second quarter of 2008. After the global financial tsunami, India’s growth and investment outlook changed dramatically, particularly so during 2011-2012 to 2012-2013. The investment-to-GDP ratio ratio declined to about 32 per cent in 2009-2010 to 2010-2011 and then fell sharply to about 30 per cent in 2011-2012.

What is particularly disconcerting, the economists deplored, was that the moderation in investment activity was accompanied by a gradual decline in the value of newly announced investment projects from an average of 10 per cent of GDP in 2006-2007 to just one per cent in 2012-2013. The share of stalled and shelved investments jumped to over 2.5 per cent of annual GDP in mid- 2011, after moderating slightly following a spike in early 2009. No wonder as the share of stalled projects remains elevated and the pipeline of new projects is exceptionally dwindling, concerns about India’s growth outlook linger longer, discouraging investors, both domestic and overseas.  But the newly formed Cabinet Committee on Investment (CCI) in January 2013 as also the Project Monitoring Group (PMG) was too late in the day to reap any worthwhile result in the short-term.

Interestingly, the IMF’s (2013) recent staff paper on India identified a slew of factors as possible contributors to the recent investment slowdown. It singled out high profile tax policy decisions announced in 2012-2013 Union Budget that had reduced foreign investors’ interest in India, while the increasing difficulty of obtaining land use and environmental permits have raised regulatory uncertainty for large infrastructure and capital-intensive projects. It also zeroed in on pronounced supply bottlenecks in mining and power with cognate consequences for the broader economy, especially manufacturing that remains in negative zone for far too long.

There has no doubt been a raging debate whether the continued dear money policy of the central bank has driven down investors’ appetite for investment activities. In this context, the IMF economists concede that though in the short-run, lowering  of nominal interest rates might provide some relief in terms of reduced interest burden, especially to corporate with high leverage, they are no cocky over its beneficial results in the medium term. They said such lower interest rates with abundant slack in the economy would stoke inflation further and exacerbate inflation trends across sectors, hurting investment. They rightly cautioned that simply lowering nominal rates without tackling deep structural issues is unlikely to lead to a sustainable revival of investments.

In short, the message to the new dispensation that is to assume office in the country before long is loud and clear. Address the basic maladies on the supply bottlenecks that brook no further procrastination and waffle, backed up with firm and resolute governance in getting off projects so that the miasma of misperceptions and uncertainty currently plaguing the investing community is lifted and lifted at once.

Merely trotting out huge numbers such as $500 billion investment in infrastructure over five-year span or one trillion dollars in the next decade as the latest manifesto of the Congress has paraded would not do with business-as-usual approach. A thorough overhaul of policy and sensitising bureaucracy to the need for doing business in India easier not only for overseas investors but also to the domestic entrepreneurs by the next ruling dispensation are too insistent to be ignored.IPA
G Srinivasan

G Srinivasan

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