Let’s crank up investments

The Indian economy has been performing well below its potential for the last two years. In 2012-13, GDP growth fell to its lowest in the last decade and new investments have moderated to a trickle.

While this can partly be attributed to the downturn in the global economy, domestic issues have also acted as a constraint. In particular, the downturn in investments was caused by high domestic interest rates on the one hand, and bottlenecks in clearance of projects on the other. The government has already started taking various steps to reverse the situation, and one can hope that some correction will take place over the next few months.

fast track for projects

Once it became clear that projects were getting delayed due to various issues, ranging from land acquisition to environmental clearances, the government set up the Cabinet Committee on Investments (CCI) to look into these issues for projects exceeding Rs 1,000 crore in size. The CCI, which is chaired by the Prime Minister, has already had several meetings in which it has set timelines for reviving stalled projects. This will certainly have a positive impact on fast-tracking large projects, especially those related to infrastructure.

In order to moderate interest rates, the government has begun the process of fiscal consolidation. Fiscal consolidation has been made possible due to various decisions taken by the government. First, it has reduced expenditure on subsidies by raising the price and limiting the availability of subsidised fuel products. Second, it has also taken some revenue-enhancing measures in the recent Budget, such as increasing the tax rate on high income earners, though it has been careful not to unnecessarily hurt investor sentiment. Finally, it has set aggressive targets for raising revenue through the sale of shares in public sector units.

All eyes on RBI

A high fiscal deficit had been crowding out private investments, as the level of government borrowing remained extremely high. It had also become difficult to keep the subsidies within the budgeted amount. With the fiscal deficit running high and fuelling inflation, the RBI has had to tighten monetary policy despite moderating growth. The process of fiscal consolidation has now begun and the government has set a target of progressively reducing the deficit to a level of 3.0 per cent of GDP by 2016-17. This should enable interest rates to soften and set off a virtuous cycle of investment and growth. All eyes are now on the RBI for bringing back the focus on growth.

The investment rate has fallen from a peak of 38.1 per cent of GDP in 2007-08 to 35.0 per cent in 2011-12. This decline would have been even sharper but for an increase in investments in physical assets and valuables made by households. The decline in investments made by the private corporate sector and the public sector needs to be reversed urgently.

In order to provide an incentive to companies to expand capacity, the recent Budget has provided for an investment allowance of 15 per cent to companies that invest over Rs 100 crore. Ultimately, investments will be driven by business sentiment, which will be impacted positively by measures such as these.

The government is also making an effort to invite investments from abroad. It has eased restrictions on FDI in several sectors, including single and multi-brand retail, civil aviation, broadcasting services and power trading exchanges. It is also keen to increase the FDI limits in the insurance and pension sectors to 49 per cent. To this end, it has introduced the Insurance and Pension Bills in Parliament. Several global players have expressed their interest, given that India remains attractive as an investment destination.

Important reforms

While all these measures will have a positive impact on investments, we would also need to look at some of the ground-level realities faced by businesses entering India for the first time. India consistently ranks low on the World Bank’s “ease of doing business” ranking due to regulatory hurdles that exist at the local level. However, the World Bank has also pointed out that India’s rank would improve drastically if the best practices followed in certain States were followed across the nation. This important set of reforms — of benchmarking good practices and adopting them — will be critical for a revival in investments without which entrepreneurship cannot flourish.

The new National Manufacturing Policy envisages setting up National Manufacturing and Investment Zones (NMIZs) across the nation with features including quality physical infrastructure, a progressive exit policy and structures to support green technologies, appropriate investment incentives and business-friendly approval mechanisms. The Delhi-Mumbai Industrial Corridor (DMIC) is being developed by the Government of India as a global investment and manufacturing destination supported by world-class infrastructure and enabling policy framework. These will certainly help improve the investment climate in the longer term.

Boost spending power

While I am optimistic about a turn in the investment cycle in the near term, I have one concern. The savings rate has declined in line with the investment rate and a rise in investment without a commensurate rise in savings may not be sustainable. Of course, a reduction in the fiscal deficit will reduce public dissaving. But for more resources to be available, what is required is an increase in household savings in financial assets.

With inflation rising over the last few years, the returns on financial assets have not been adequate. As a result, households have increased the weight of physical assets such as real-estate and gold in their portfolio. This has reduced the flow of resources to industry.

The government, therefore, needs to work on easing supply-side bottlenecks that have aggravated inflationary pressures, especially in food products. To this end, market reforms in agriculture and increased investment in rural infrastructure are imperative. This will increase people’s spending power, leading to a recovery in consumption, and also correct the shift in portfolio allocations.

To conclude, I do believe that the government is taking note of the concerns expressed by industry. As the announcements made in the recent Budget and outside are implemented, the economy will gradually return to a path of recovery.

( The author is President, Confederation of Indian Industry and Chairman of the Godrej Group. )

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