Make no mistake: The Indian economy cannot recover its lost momentum without a strong investment revival led by the corporate sector. The acceleration in economic growth in the mid-1990s and the middle of the last decade coincided with splendid booms in corporate investments, as companies set up new capacities across several industries.
The investment scene right now is depressed. So the most immediate task for the next finance minister will be to get investments back on track. Data released by rating agency Crisil on Tuesday showed the extent of the damage. Growth in corporate investment in fiscal 2012 was at its lowest level in five years. As a result, depreciation charges as a percentage of sales have also dropped to a 10-year low. Crisil does not expect a quick turnaround in animal spirits, which is a fairly realistic assessment of the situation. The reasons: global economic uncertainty, the domestic policy logjam, delays in land acquisition, and the pressure on borrowing costs because of the large fiscal deficit and high inflation.
The lack of adequate corporate investments is not because of the two usual reasons: high interest rates and huge excess capacity. India has neither right now. Balance sheets are also in better shape than they were around 10 years ago, even though select companies have too much debt.
Illustration by Jachandran/Mint
Companies are sitting on cash because of policy uncertainty. Lots of approved projects are not being implemented because of problems on the ground. Some of these obstacles could be because of genuine concerns about the impact of projects on local communities, but the overall slowdown in decision making seems to be the more important reason. We had earlier suggested that the government should focus on unclogging the investment pipeline.
To be sure, companies have capital spending plans even at this juncture. On Tuesday, Coca-Cola said it would invest $5 billion in its India business over the next eight years. New car factories are also being planned. Many business houses in India have projects on the drawing board. Reliance Industries has announced a Rs 1 trillion investment plan. Others such as Bharti Airtel, the AV Birla Group, Tata Motors and Tata Steel have significant expansion plans, though some of the money is for their overseas ventures.
India needs an investment revival in the coming quarters. Even while the new finance minister will have to convince the political leadership that the economy needs a reforms stimulus, he should also push various ministries to clear the way for projects that are currently stuck in red tape. An investment collapse from here will do immense damage to the long-term India story.
How can the investment pipeline be freed up? Tell us at firstname.lastname@example.org