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Investment slowdown

Economic slump induced by a large number of stalled projects and fewer new ones concerns the Indian economy – recording a high growth rate

Investment slowdown

Despite higher economic growth, the slowdown in industrial investment in the last five years is a major concern. New projects are fewer. While the government is busy selling its stake in the country's most reliable public sector enterprises, the private sector is not investing enough in the areas such as infrastructure, large-scale industry, housing, manufacturing, mining, and metals. The domestic manufacturers are struggling to fully utilise their existing capacities in the face of growing imports. The record foreign direct investment in the last four years had little impact on the manufacturing sector as a substantial part of it went into merger and acquisition (M&A) of Indian companies by foreign investors. It may not be that the government is unconcerned. But, its actions or policies have failed to deliver.

Take, for instance, the coal sector. The coal demand for the thermal power sector, its major consumer, in 2018, far exceeded the local supplies. As a result, the country's coal import during April-December, 2018 stood at nearly 172 million tonnes, representing almost 25 per cent of domestic production. Sadly, the domestic coal industry failed to implement new projects worth over 11,000 crores. The total investment in all pending coal projects is worth over 35,000 crores. There is no convincing explanation of what are stalling the new coal projects when the coal demand is constantly growing. India's total coal production is less than 700 million tonnes as against China's three-billion-plus tonnes.

While the government itself is in the industrial investment exit mode, not many domestic private sector entrepreneurs barring a few business houses such as Tata, the Mukesh Ambani group, Mahindra, Adani, and Jindal, have shown much interest in local industrial expansion. The share of private investments in infrastructure has fallen to a 10-year low of around 25 per cent in the current fiscal. Its share dropped almost six per cent in the last five years compared to the period between 2009 and 2014. However, investment analysts say that the industrial investment growth has been downward ever since 2004, after the exit of the Atal Behari Vajpayee-led government. The policy focus of the subsequent governments failed to pep up the new industrial projects and investments in the last 14 years, during which the services sector showed exponential growth, eclipsing the manufacturing and industrial sectors.

According to the Centre for Monitoring Indian Economy (CMIE), new project investments have been the lowest in 12 quarters at about 100,000 crores during the quarter ended December 31, 2018, indicating a slowdown in the Indian economy. Others said the number is the lowest in 14 years, since mid-2004. The CMIE report said that while the private sector capital expenditure remained sluggish as companies continued to focus on pruning balance sheets and deleveraging, the numbers came as a surprise because the government/public sector investments also did not seem to be enough to move the needle. The new investments have declined over 55 per cent on a year-on-year basis, while sequentially, it has fallen nearly 53 per cent. The most disturbing part is the number of projects announced but not implemented. Investments stalled in such projects stood at a record level of over 300,000 crores. This is much higher compared to the figure of 15,486 crores in the three months ended December 2017, as well as compared with 25,298 crores seen during July-September 2018.

Reports showed that the value of all stalled projects at the beginning of 2018 rose to a record level of nearly Rs 14 trillion. The private sector accounted for over two-thirds of the value of these stalled projects. The percentage share of the value of stalled private sector projects is the highest since March 2004. Interestingly, power projects continue to dominate stalled projects, accounting for over 39 per cent. The next came the stalled manufacturing units. Other sector-wise areas of stalled projects include mining, services, construction, and real estate. Such high level stalled projects dampened the spirit of the announcement of fresh projects, especially in the private sector.

The present government, despite its so-called focus on 'Make-in-India', failed to improve the implementation rate of new projects to restore the confidence of the private sector in new investment in domestic production. Instead, the demonetisation of high-value currencies, followed by an under-prepared implementation of a four-level goods and services tax (GST) system, which kept the most important oil sector out of its ambit, may have further impacted fresh industrial investment in the country. The revival of stalled projects is extremely crucial for sustained economic recovery.

Although the manufacturing industry's order book position had improved in the last two quarters, capital goods and heavy engineering majors seem to feel that the operational environment in India still remains challenging. Fresh investments in the power, coal, steel, cement, mining, refinery expansions, railway modernisation and expansion, highways and shipping can change the environment. Unfortunately, they are unlikely to gather speed until the next government is installed.

In fact, the implementation of stalled projects should receive top economic priority of the next government. This will automatically increase the GDP growth, putting the country's industry and economy on top gear. The employment market will boom once again, ensuring steady growth of income, demand, and supplies. There is no better way to serve the economy than creating strong bases for industry and agriculture. Fortunately, the country is doing reasonably well in agriculture. Economic agenda and the financial ecosystem need to be reset now to achieve higher growth. According to top industrial entrepreneurs, India's mining industry's share of its GDP alone has the potential to quadruple, from 2.5 per cent to 10 per cent of GDP. Thus, the pending new projects, if implemented without much delay, have the potential to raise the country's GDP growth to 8.5 per cent in another two to three years.

(The views expressed are strictly personal)

Nantoo Banerjee

Nantoo Banerjee

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