Economic Survey 2019: Govt must ensure predictable policy for India Inc

With private companies reluctant to invest in fresh capacity, the Economic Survey has suggested apart from reducing interest rates and encouraging savings, the government must ensure predictable policy for India Inc.
 
“Investment, especially private investment, is the ‘key driver’ that drives demand, creates capacity, increases labour productivity, introduces new technology, allows creative destruction and generates jobs,” the Survey said.
 
It said after falling for close to a decade since 2008, India's investment had turned the corner since the first quarter of 2017-18. Gross fixed capital formation as a proportion of GDP, commonly referred to as the fixed investment rate, fell from 37 per cent in 2007-08 to 27 per cent in the following 10 years but recovered to about 28 per cent recently.
 
The Survey said reduction in real interest rates could foster investment and create a virtuous cycle of investment, growth, exports, and jobs.
 
India Inc chief executive officers (CEOs) say while the Survey is in the right direction, lack of demand and high interest rates are deterrent to investment in fresh capacity.
 
"The transmission of the policy rate cut by the banking sector will be crucial in boosting liquidity and inducing demand," said Rajeev Talwar, CEO and managing director of DLF and president of the PHDCCI.

 
A CEO of a steel firm said the high interest costs in India were an impediment to investment and the firm would take a call on fresh investment in the coming months.
 
Most of the new investment in the country in recent times by cash-rich companies has been via acquiring bankrupt firms. While Tata Steel invested Rs 35,400 crore to acquire Bhushan Steel, ArcelorMittal has agreed to pay Rs 42,000 crore to buy Essar Steel. Similarly, the Aditya Birla group has augmented its cement capacity by buying Jaypee and Binani Cement. Fresh investment by Indian companies is negligible because consumption demand started falling since September last year, hitting sales of two-wheelers and cars, and home loans. 
 
The Survey said there were various factors affecting corporate investment. Apart from low borrowing costs, the other factor encouraging investment, the Survey said, was that the producers must get higher prices.
 
"Rise in prices are expected to trigger greater investments as businesses find it profitable to do so as long as consumption demand is sufficiently strong to overcome the impact of inflation," it said.
 
Finally, the report said, the rising utilisation of capacity in any quarter was expected to have a positive relationship with investment growth in the following quarter. As of now, average capacity utilisation in Indian companies is around 75 per cent.