Bright prospects for 2018

But, growth presumes continuous investment. India had grown fast –at its highest at over eight per cent—when the investment rate was also very high. We have seen that plunge since. Along with the drop in investment rate, the overall growth rate has also slowed down. So then, the question is how do we sustain our investment levels from year to year.

Primarily, investment should rise when it is profitable for the investors; they see prospects of earning some money on their outlay. No one will invest for the sake of the country growing. It is the old Adam Smith rule that when everyone takes care of their own self-interest overall societal development takes place. What are the conditions for fresh investments in the Indian economy now?

First and foremost, the demand should be buoyant enough for industry to invest. Only when existing capacities are being used reasonably high, fresh investments can be forthcoming. The latest surveys indicate that capacities are not being used up satisfactorily and it is not as if output cannot be significantly increased without creating fresh capacity. The Index of Industrial Production and the sectoral capacity utilisation figures are showing just that.

Add to that, the production trends of the capital goods sector also are indicating that there is some slack in the economy. The capital goods sector can be used as a proxy for the level of investment, unless of course, all machinery and plant are being imported for industrial expansion. While it is true that some of the machinery items, particularly in the power and telecoms sectors, are being imported for balancing investment, other areas are not demanding too much of fresh capital equipment.

In some sectors of the economy, like ordinary consumer articles, a lot of domestic demand is being met by cheap imports from China. The huge trade deficit with that country, continuing for years now, simply indicates that. For domestic demand to be met from domestic production, it is essential that most of the cheap imports –from electric kettles to garden umbrellas and kitchen wares —which are all being imported, be curbed. It could give a boost to domestic production and industries could start thinking of fresh investment to meet the surging demand.

Second, the investment cycle could resume once more when funds are available and at reasonable rates. The bulging portfolio of non-performing assets of the major lenders is acting as a brake for the domestic industry. The bad debts on banks' balance sheets and the strict recognition norms now being implemented by the Reserve Bank of India have made the banks risk averse. First, they lack fresh free funds and second, they are being risk-averse and rather parking their funds in safe government bonds and undertaking treasury operations to remain profitable than offer their funds to borrowers.

Stressed balance sheets and the overburden of bad debts have skewed their assets to liabilities ratios and they can hardly offer loans. So, the current programme of assets resolution of PSU banks –which have close to 85 per cent share in overall lending—should inject enough vitality to resume their core banking activities. The investment cycle could be expected to resume thereafter.

There are still some other positive developments which could help the process of private investment. The fledgeling corporate bonds market could work in disintermediation and channel funds directly into the corporate sector. While the development is too recent, yet it holds promise. There is a background to this. Since the demise of the so-called development finance institutions, namely the three development funding bodies Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India (IFCI) and the Industrial Credit and Investment Corporation of India (ICICI), long-term debt for project funding had withered away. Two of these turned into regular commercial banks and one had gone virtually defunct.

In the absence of these DFIs, the industry was finding it difficult to get long-term project finance at reasonable rates. The commercial banks were giving mainly working capital loans and long-term loans could be raised from abroad. But only large companies could do that.

Equity capital could then be the only resource for funding long-term projects and it is not always possible to raise equity capital. Equity could be a costly form and it is also rather long-term in that you cannot raise equity for investment and wipe it out after a while. Debt funds are what is needed.

Corporate bond markets, once fully operational and liquid, could serve this function very well. The emphasis on developing India's domestic corporate bonds markets is a welcome move and could eventually meet industry's need for long-term debt funds effectively.

These are of course the financial aspects of investment. There are some physical areas as well. You cannot really invest unless the investment is really sought after. What is happening, however, in this country is that investment is deterred. Without getting land for setting up new factories or other facilities, no investment can happen however much money is available.

What is needed is a stable policy environment and commitment to basic economic goals. Without that, growth or development cannot happen even when that is the only way to raise the country to convert its potential.