A false dawn

Growth may suffer, with no recovery in investment

The collapse in India’s growth over the past year and a half is driven by a deep-rooted unwillingness to invest on the part of corporate India. One reason for this is the high cost of capital in a restrictive, inflation-fighting interest-rate regime. And, the other reason is a climate of regulatory and policy uncertainty. Of late, stirrings of activity in New Delhi have led to something of a false dawn — various incremental measures have been announced, and the capital markets have been given a few reasons to be excited. However, the disconnect between these facts and the real, on-the-ground situation continues. As this newspaper reported on Monday, ten of India’s top bankers, while meeting senior officials of the Reserve Bank of India, said that companies were continuing to keep capital expenditure on hold, concerned about business prospects. Their pipelines of sanctioned lending, the bankers agreed, were fast contracting; nobody wanted to borrow. One was quoted as saying that the top 100 companies would believe that “nothing has changed despite the reforms”.

The stalling of the manufacturing sector — the core sector grew 2.1 per cent year-on-year in August following near-zero industrial growth the month before — is thus unlikely to be revived in a hurry. Indeed, even the medium-term prospects of 7-8 per cent overall growth seem in jeopardy if investment does not recover soon, given the lag time of capital expenditure. As an index of comparison, banks and financial institutions sanctioned projects worth Rs 3.9 lakh crore in 2010-11, the last high-growth year. In 2011-12, that came down to Rs 2.1 lakh crore; and, the RBI has said that planned capital expenditure for the current year is expected to be even lower, at Rs 2 lakh crore. Clearly, a return to a high-growth path is impossible with such low levels of corporate investment. Finance Minister P Chidambaram has said that if investment returns to 37-38 per cent of gross domestic product, India will return to 8 per cent-plus growth. This is a tough ask. Gross fixed capital formation, the largest component of investment — and directly dependent on corporate expansion — fell below 30 per cent of GDP in the first quarter of 2012-13.

So far, the government’s actions have focused on short-term measures to keep the capital markets happy and to address the yawning fiscal deficit. Restoring investment — through reviving “animal spirits” — will require more than that. The Kelkar committee on fiscal consolidation has said as much, saying that structural reform to boost investment must go hand-in-hand with administrative measures to control the deficit: “Reducing the regulatory and business climate impediments to private investment are essential, from pricing to taxation and access to land and other resources.” The renewed signs of life in the central government are welcome. But, all its efforts will fail to revive growth unless the regulatory difficulties blocking private investment are eased.