An abiding belief of commentators on the Indian economy has been that investments have slowed down largely because of lack of policy initiatives and that this is the principal reason why growth has slowed down. The prime minister has emphasised on the need to spur the animal spirits of entrepreneurs in the past and more recently, he has even tried to do so through policy initiatives. Diesel prices were raised on last Thursday, foreign direct investments in retail and aviation were liberalised on Friday, and on Saturday, the prime minister warned that if we continue to suffer a " policy logjam", growth rate could fall to 5% with very poor outcomes on inclusion. The finance minister has proposed a National Investment Board to give "final" decisions on large infrastructure projects. Possibly, there is more to come on the policy front.
Will all this lead to a revival of investments? I think it will, but we need to be reasonable in our expectations.
More than half of the projects that were abandoned or shelved by promoters in the past two years were because of their inability to acquire land. According to CMIE’s CapEx database, projects worth Rs 1.8 trillion were shelved during April-August 2012 on top of projects worth Rs 4.5 trillion that were shelved in 2011-12. This is not a problem that the government can solve in favour of private investments. As a result, a large proportion of projects announced earlier on the premise of easy access to cheap land with the active help of governments will continue to be shelved. New projects that involve such sops from the government will not be proposed. As a result, the number of new investment projects will continue to remain low.
New investment proposals cannot match the proposals made during the boom years from 2004 through 2008. This boom was predominantly based on cheap access to natural resources, particularly land, coal, iron ore and bauxite. These projects were very large in value. We are unlikely to see a similar boom in special economic zones ( SEZ), ultra mega power plants (UMPP) or Posco-sized steel plants.
Sure, there is still a lot of investment to be made in infrastructure. But, no matter how enthusiastic the animal spirits turn, it is unlikely that the aggregate investment proposals will match the boom years for some time to come unless the government again provides sops- such as the incentives offered to the SEZs, IT and petroleum refining sectors - or it forcibly procures land for industry.
But, it should not and it need not do so. The current investments pipeline is fat, investment opportunities are large, corporates are cash-rich and profit margins are good. It is possible for all this to translate into a sustainable investment boom if the perceptions that large investments are only possible through extra-ordinary sops such as the ones handed out earlier, are removed permanently.
Well before the government could see reason to act, the automobile industry saw reasons to invest without sops. Investment proposals to set up new automobile capacities in India were up 160% in 2011-12 compared to the proposals made in 2010-11. New investment proposals for petroleum refining in 2011-12 were the highest compared to any time in the past. The first quarter of 2012-13 saw a sharp increase in new investment proposals in the cement industry.
The problem is that even sharp increases in investments in automobiles and cement cannot match the increases in SEZs and power projects. As a result, the aggregate new investments will remain small compared to the aggregates of the 2004-2008 years.
As a result, the latent investments activity and the little spurring of animal spirits that the prime minister is attempting is most likely going to raise the proportion of investments in GDP to about 37% from its current level of around 35.5%. The ratio is unlikely to rise again to 38% -a level achieved in 2007-08- in a hurry. But, an investment ratio of 37% is likely to be more sustainable with a handsome GDP growth rate if it is not based on unfair and unsustainable sops.(This article appeared in the Economic Times dated 17 September 2012.)