The alarm bells should be ringing. First, came the news of a marked decline in FDI when other emerging economies were successfully attracting larger volumes. Then, a distinct deceleration became visible in the overall economic activity during the last quarter of 2010-11, when GDP growth declined to 7.8 per cent. And, now it is evident that we are seeing a virtual stalling of investment growth.

In March 2011, growth in gross fixed capital formation plummeted to 0.37 per cent, compared with 19.48 per cent in the quarter ending March 2010.

According to CMIE data, the volume of capital locked up in stalled projects, that is, projects that have been initiated but are not going forward and hence suffering from time and cost over-runs, is a staggering three times the level in 2007. Moreover, it seems that investors are holding back, with the new investments declining to a less than a third in the last two quarters in relation to the previous three quarters. Clearly, it is time for urgent action if the India growth story has to remain on track.


The period from September 2010 has seen a precipitate and dramatic weakening of animal spirits and investment sentiments. This is all the more remarkable if one recalls that in the first three quarters of 2010 (January to September) growth in gross capital formation was a healthy 16 per cent.

Clearly, some events starting in August-September 2010 have knocked the wind out of investment sails.

The fear is that unless some significant measures are taken to rectify the situation and bolster investment demand, economic growth may falter in the face of strong headwinds of policy and regulatory uncertainty, political confusion, and a marked slowdown in decision-making, which have characterised developments in the last nine months.

It is important to understand the critical importance of raising investment demand. Without the required investment activity and concomitant capacity expansion, supply will seriously lag behind burgeoning demand, resulting in strong inflationary pressures. This would be unsustainable and result, sooner rather than later, in growth being stifled by rising interest rates.

It is, therefore, not surprising that the main burden of the submissions by the sizeable group of senior industrialists and bankers in their meeting with the Prime Minister's Economic Advisory Council (PMEAC) on Thursday, was that it was crucial for the government to unambiguously signal that the overall regulatory and policy regime will remain investor-friendly.


Steps should be quickly taken to remove procedural impediments and roll back some of the measures that have tended to bring back memories of the licence-control raj.

Given the lack of fiscal space, it is pointless to even contemplate that a decline in private investment could be made up by increasing the volume of public investment.

In fact, the government may be seriously hard-pressed to achieve its budgetary target of containing the fiscal deficit at 4.6 per cent of the GDP. With fertiliser, food and petroleum subsidies already greater than Rs 150,000 crore and the prospect of another Rs 60,000 crore being added to this subsidy bill with the enactment of the Food Security Bill, fiscal consolidation will be difficult.

Moreover, things might get more difficult on the revenue side as well with an economic slowdown resulting in lower tax collections and a weak equity market, making it difficult to offload government equity in public sector enterprises. In fact, policy credibility would be more effectively restored if the government were to announce a revised and more credible fiscal deficit target.

This would signal a willingness to recognise the problem, rather than try to conceal it. Such a recognition is often the first step in addressing the problem.

It is time to take the necessary steps to improve the investment climate and revive the animal spirits. Pending structural reforms should be speedily implemented. The plethora of procedures that stifle entrepreneurship should be rationalised and the compliance burden minimised. This will also minimise the sources for rent generation.


More importantly perhaps, the government must begin to recognise that there are limits to consumption-driven growth achieved by the classical Keynesian tools of increasing the share of transfer payments and subsidies in the economy.

In an economy with highly underdeveloped social and physical infrastructure and an underdeveloped stock of human capital with a large unskilled workforce, there are clearly limits to raising domestic consumption demand without the corresponding increase in productive capacity.

The growth model based on transfer schemes like the MGNREGA, the farmers' loan waiver and assorted consumption subsidies is now running out of steam. The danger is that the primacy of such schemes in the policy mix has regenerated the culture of competitive populism to remain in or regain political office.

This can be disastrous as it could result in both unviable fiscal profligacy and persistent inflationary pressures, as demand expands while productive capacities stagnate for want of investment.

Such competitive populism and the consequent loss of focus on sustaining growth could result in souring of the Incredible India story.

Quite understandably, therefore, the all-round emphasis in the meeting of the industrialists and bankers with the PMEAC was on producing a credible India — one that has put in place a policy and regulatory regime that is stable, liberal and conducive to investment.

(The author is Secretary-General, Ficci. The views are personal. > )