Large infrastructure projects have had a hard time in India of late. It is not unusual for power, highways, ports and other projects to get enmeshed in clearance delays. This, in turn, affects bank lending. Today, matters have reached a point where these issues have acquired macroeconomic proportions.
As reported in Mint on Friday (see story on Page 1), a number of such projects will soon approach their implementation deadlines. In the absence of clearances, there is danger of stalled repayments of loans. The amount of outstanding loans to the infrastructure sector at the end of December stood at Rs6.9 trillion, up from the Rs5.96 trillion a year ago.
That, however, is not the only “current period” problem. There are bigger problems at hand. Recently released data from the Central Statistical Office (CSO) shows that India’s savings rate plummeted dramatically in 2012 to 30.8% of gross domestic product (GDP) from 34% in 2011. This latter figure in itself marks a serious decline from the 36% of GDP figure in 2008. It is not hard to guess why India’s current account deficit (CAD) has widened to dangerous proportions. On the one hand, a low savings rate has endangered future investment possibilities and on the other hand, this also exacerbates the danger of an external shock (say from a ratings downgrade). At the moment, the government is almost in a crisis fighting mode: the finance minister’s “roadshows” abroad are just one indicator of India’s search for external financing to plug this yawning CAD.
The solutions to this problem are unlikely to be found abroad. For starters, the newly fashioned cabinet committee on investment needs to get moving fast. Clearances for coal linkages; prodding Coal India Ltd to produce more; and removing environmental clearance and land acquisition roadblocks are needed very quickly if the country is not to land itself into an economic mess. This is no longer a cyclical—business cycle-related—problem. It will be good for policymakers to admit that there are structural factors at work that need to be confronted head-on.
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