The task of reviving economic growth
2 min read 18 Dec 2012, 01:57 PM ISTFor a full-scale revival in investment momentum, what matters is entrepreneurial willingness to invest
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The reform punches keep coming. Besides creating the cabinet committee on investments, earlier proposed to be called the national investment board, the government approved the new land acquisition Bill last week and promised continuous supportive action to revive growth, including “bitter medicine" for restoring economic health.
As chief economic adviser Raghuram Rajan put it, the limits on providing fiscal or monetary stimulus have been reached; hence, growth has to be elicited from other domestic resources or from the supply-side of the economy. In this context, will measures like the new cabinet committee on investments help trigger an investment revival? How fast and to what extent?
There’s need to distinguish between restarting old, stalled projects and entrepreneurial willingness to invest in this regard. The projects stuck now were conceived, planned and rolled out several years ago. They stopped because of reasons such as constraints in land acquisition, environmental clearances, fuel-supply linkages and so on. The cabinet committee on investments, with its targeted intervention to reconcile differences between various ministries and a collective decision-taking mechanism to overcome individual fears about ex-post scrutiny, can certainly help unblock such investments. Even if it can push off one or two large projects into an active phase of implementation and execution, the speed-up will impart an impulse to the growth process.
But for a full-scale revival in the investment momentum, what matters is the entrepreneurial willingness to invest: the desire to venture and undertake new, large-scale capital investments. Will the cabinet committee on investments help regenerate that enthusiasm?
The entrepreneurial spirit to invest has received a setback in recent years, as reflected from the marked slowdown in new project announcements, especially in infrastructure. This is mainly due to arbitrary policy changes, reversal of some decisions and acquisition/pricing issues surrounding factors of production and its inputs; developments that have triggered changes in processes and procedures. The net outcome is uncertainty about the new equilibrium that may replace the old order.
Clearly, much of this lies beyond the cabinet committee on investments’ realm. The transition to a new equilibrium will take time: In the first round, the new arrangements—in spheres such as land acquisition, mining allocations and natural resources’ pricing—need to be specified and then fall into place; thereafter, the private sector—the source of investment energy—will respond to it.
The new equilibrium may also be costlier. Since it’s the quickness and intensity of private responses that matters for a full revival of the investment cycle, its probability is low in the short-term; even if investment ideas are germinated now, for these to acquire shape, be implemented and executed will take at least a couple of years. Therefore, the cabinet committee on investments’ significance lies in the impetus it can provide in the interregnum.
Renu Kohli is a New Delhi-based macroeconomist; she is currently lead economist, DEA-Icrier G20 research programme, and a former staff member of the International Monetary Fund and Reserve Bank of India.
