Why private investments continue to be sluggish in India
There is an urgent need to activate stalled projects and clean up balance sheets of corporate firms and the banking sector to revive the investment cycle. It is important to revive overall investment --- especially in infrastructure ---- for balanced growth.Updated: Jul 10, 2017 07:22 IST
The NDA government launched the ‘Make in India’ programme in 2014 to boost investments in the manufacturing sector. Subsequently, it took further steps ---- infrastructure development, FDI reforms, initiatives for quick approvals and clearances, bringing insolvency and bankruptcy code and the Goods and Services Tax ---- to push private investment, particularly in manufacturing. Unfortunately, private investment remains sluggish and could even derail India’s growth story.
The investment ratio slowed down to around 30% after the global financial crisis (GFC) from 38% in 2007. Though capital formation improved to 33% in 2016–17, mostly due to net capital inflows, the post-crisis recovery of investment has been weak to sustain 7–8% growth. The growth in capital formation was 5.1% during 1990–1995, peaked at 17.5% during 2004–08, but slowed down thereafter, reporting a growth of 4.3% during 2012–16. Though public sector investment improved, private sector investment in manufacturing declined from 19.2% in 2011–2012 to 16.8% in 2014–15. Even investment in agriculture and construction sectors reported a down turn, affecting job creation.
Investments in the corporate sector also witnessed a fall post-GFC from 16% in 2008 to around 10% in 2016, due to debt burdens, slowdown in private credit and twin balance sheets problems in the banking and corporate sectors. Stalled projects after GFC, almost 6 to 7% of GDP even now, weakened the balance sheets of corporations and public sector banks and, in turn, limited private investment and banks’ capability to lend.
In fact, the credit growth in recent months has been the lowest over a long period of time as the stressed assets of the banking sector rose to Rs 9.6 lakh crore compared to the total net worth of Indian banking sector of Rs 9.24 lakh crore. Hence, there is a pressing need for enhanced recapitalisation of public sector banks (PSUs) and also divesting the ownership.
Moreover, the present universal banking system does not have core competency for efficient project appraisal and manage long-term project loans. So it is time to either improve the competency of the PSUs in this area or adapt to a differentiated banking system. There is also a need to work on strengthening bond market for long-term financing.
Stalled projects, both in terms of value and number, is a cause of concern. Unfortunately manufacturing, which is essential for job creation, has maximum number of stalled projects.
Recent data shows, the new investment realisation rate in transport infrastructure sector is falling since 2008 mostly due to issues like land acquisition, environmental clearances and other market conditions.
It’s time to review all stalled projects and effectively use bankruptcy laws, asset restructuring, etc. to clean up bad assets and provide restructuring option to stakeholders. The reasons for stalled projects are mostly related to unfavourable market conditions, and delay in clearances and debt overhang.
For example, steel is a big sector with positive spill overs but this sector has more than 20 big stalled projects due to market conditions such as cheap imports, supply side bottlenecks like quality coal, high logistics cost. It’s time to analyse and deal with sector specific problems particularly in labour intensive sectors like construction, real estate, steel, power etc.
Falling exports also seriously affected investment. Both Special Economic Zones (SEZs) and Exports Oriented Units (EOUs) have failed to deliver in terms of exports, investment and employment generation.
The government must revise these specific schemes, designed to augment production for exports, to suit the changing global environment and ensure proper functioning. Apart from infrastructure development, which reduces trade cost and improves competitiveness, the government must work on trade facilitation that includes logistics.
There is an urgent need to activate stalled projects and clean up balance sheets of corporate firms and the banking sector to revive the investment cycle. It is important to revive overall investment --- specially in infrastructure ---- for balanced growth.
The services sector is not labour intensive and cannot sustain itself. Importantly, one cannot improve the standard of life of masses when more than 50% of labour force depends on agriculture, which contributes 14% to GDP.
The need of the hour is increasing private investment in the economy for India to remain on a high growth trajectory.
Pravakar Sahoo is professor, Institute of Economic Growth, New Delhi
The views expressed are personal