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Home >Opinion >Columns >We are in the grip of an industrial stagnation

We are in the grip of an industrial stagnation

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India is yet to emerge from a slump in private investment that has kept capital formation too low for too long

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The catchphrase “Houston, we have a problem" is the harbinger of a serious crisis, or even a life-threatening setback. The phrase is actually a version of the original distress call made by Apollo-13 astronaut Jack Swigert (“Okay Houston, we’ve had a problem here"), but it has become a popular way of conveying impending disaster. In the spirit of indigeneity, it is perhaps time to devise an Indian distress call because key economic indicators are flashing red.

The catchphrase “Houston, we have a problem" is the harbinger of a serious crisis, or even a life-threatening setback. The phrase is actually a version of the original distress call made by Apollo-13 astronaut Jack Swigert (“Okay Houston, we’ve had a problem here"), but it has become a popular way of conveying impending disaster. In the spirit of indigeneity, it is perhaps time to devise an Indian distress call because key economic indicators are flashing red.

Two papers by Reserve Bank of India (RBI) staffers, published in the September issue of its bulletin, read with the central bank’s latest Handbook of Statistics, provide an unflattering view of the economic landscape.

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Two papers by Reserve Bank of India (RBI) staffers, published in the September issue of its bulletin, read with the central bank’s latest Handbook of Statistics, provide an unflattering view of the economic landscape.

The first paper (bit.ly/3AIZ9d4), titled ‘Changes in Sectoral Bank Credit Allocation: Developments Since 2007-08’, provides a dire snapshot of the industrial stagnation that has gripped the Indian economy. The paper shows bank credit offtake boomed from 2007-08 to 2013-14, posting a compound annual growth rate (CAGR) of 16.8% for the period. Disaggregated data shows industrial credit registered a CAGR of 19.6% and non-industrial 14.6%. Cut to the subsequent period of 2014-15 to 2020-21: while credit offtake exhibited a sharply lower CAGR of 8.3%, industrial credit growth has plummeted to 1.6%.

To be fair, there can be valid arguments for this sharply lower industrial credit growth. Companies may have replaced bank credit with alternative funding sources (such as, equity or overseas borrowings, among others). For example, foreign direct investment in private-sector manufacturing and service companies grew by almost 140% between 2013-14 and 2019-20. Also, the indiscriminate credit boom of 2007-14 begat a pile of non-performing assets, leading to risk aversion among banks. Yet, despite these compelling factors, data shows that the Indian private sector’s appetite for fresh investments has diminished over the years.

For example, World Bank data shows gross capital formation in India has slipped from its 2007 peak of 41.9% of gross domestic product (GDP) to just 28.4% in 2020. Seen differently, the growth rate of absolute amounts invested in gross capital formation has not kept pace with the growth rate of nominal gross domestic product (GDP).

Some of the reasons can be found in the second paper (bit.ly/3kBD6zJ) by RBI staffers, titled ‘Private Corporate Investment: Growth in 2020-21 and Outlook for 2021-22.’ The investment climate has been challenging for some time now, with the paper showing a sharp fall in new private-sector projects being taken up every year and a sharper fall in the number of projects getting completed each year. This implies that, apart from the shrinking private sector bandwidth for new investments, challenging economic conditions are extending the gestation period for each project. Data also reveals a clear bias in favour of large projects: the larger the project, the longer it takes to complete. A strategy note from JM Financial uses granular data to show that the completion time for projects between 1,000 crore to 5,000 crore has stretched from 7 years in 2016-17 to 11 years in 2020-21. In addition, there are many projects either stalled at the gates, initiated but delayed, or worse, even abandoned. This has its own repercussions. Longer completion time implies cost escalation and uneconomic returns on the asset, as well as second-round effects for the financing sector.

The situation has, predictably, worsened during the pandemic and recovery seems like a long-drawn-out affair, despite sentiment-defying noises from sundry cheerleaders. RBI’s September state-of-the-economy report, while gushing about future prospects, slips in a candid admission: “Exports outstripped pre-pandemic levels and imports are poised to catch up, but private consumption and fixed investment are still “work in progress." The last two mentioned economic indicators are pivotal if India wants GDP to grow upwards of 6-7% consistently in the near future. Reports show that while low interest rates have helped the corporate sector refinance and reduce its debt overhang, it is still some distance away from taking fresh investment decisions; this invariably means an entrenched sluggish investment climate for some more time.

It is by now clear that government must avoid unilateral policy measures which impart medium-to-long term structural shocks to the system. Implicit in the protracted completion rates of new projects is the assumption that industry probably has to contend with myriad obstacles and sudden rule changes, whether in the states or at the Centre. This has a direct bearing on the government’s ambitious National Monetisation Pipeline (NMP, which plans to raise 6 trillion over next four years), because a large proportion of the new private projects being announced or financed over the past few years were in the infrastructure sector. Early readings indicate that Indian industry is still wary of wading in, uncertain of how to insulate itself from the unpredictable regulatory and legal flux that is commonplace in India. In addition, there are still many grey areas in the NMP framework.

But signals from government finances till July are instructive: Buoyant tax receipts (34.2% of 2021-22 budget estimates) have raised hopes, but tepid capital expenditure figures (23.2%) dampened spirits. With the Union finance ministry now lifting spending curbs on various ministries and departments, some of the chronic despondency will hopefully be reversed.

Rajrishi Singhal is a policy consultant, journalist and author. His Twitter handle is @rajrishisinghal.

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