Investments in greenfield projects may not happen immediately, given the debt-laden balance-sheets of most private corporate.

The dip in industrial output this September over the same month last year caps a dismal first half of the current fiscal, which has seen practically nil growth (0.1 per cent). The picture gets even worse when one looks at capital goods production, a fair proxy for investment activity taking place in the economy. September marks the seventh consecutive month of negative growth for this sector. And the fact that it has been negative in all but two months since July 2011 shows how prolonged and entrenched the slowdown in fresh capacity creation has been. When combined with a decline in this year’s kharif output of foodgrains, oilseeds, sugarcane and cotton, we are talking of a first-half GDP growth not exceeding five per cent even after factoring in the performance of construction and services.

At the same time, one can still hold out the hope that things may have bottomed-out and the second half of 2012-13 would turn out somewhat better. This optimism is partially grounded in the monsoon’s rebound from August, which may be beneficial to the rabi crop that is currently being planted. Besides offsetting the setbacks in the kharif season, it will also help restrain inflation in food articles (which is already visible in vegetables, for instance). In addition, the various reform announcements over the past two months have created a buzz that has been positive in terms of sentiment, even if translating it into actual investments may take some time. Once consumers feel reasonably assured of their jobs not being on the line – which wasn’t quite the case till a couple of months ago – and receding food price pressures allow for greater disposable incomes, they would start spending. In any case, consumer spending has always tended to be more resilient compared to investment expenditure in India, accounting for 60 per cent of the country’s GDP.

That said, a revival in private consumption expenditure alone may not be enough to deliver even the 5.8 per cent GDP growth now being projected by the Reserve Bank of India. Consumption growth cannot be sustained for too long without new income-generating jobs, which can only come from investments in greenfield projects or expansion of existing facilities. That may not happen immediately, given the debt-laden balance-sheets of most private corporates, whose restructuring and cleaning-up may take a few quarters. All the more reason, then, for the Government to get its fiscal house in order, so as to release resources from wasteful consumption to productive investment avenues. Alongside, it should look at private projects currently being held up purely on account of procedural wrangles involving multiple departments, each working in separate silos. This fragmented decision-making apparatus needs overhauling, which is why the setting up of the proposed National Investment Board cannot brook any further delay.

(This article was published on November 12, 2012)
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