The Collapse of Private Investment in India- Reviving the Cycle

The revival of the investment cycle will require a concentrated attention from the new central government. High fiscal deficit has reduced their abilities to provide incentives or contributions for investments. Under the circumstances they need to facilitate by removing hurdles on projects rapidly.
Poor capacity utilizations in industries like Capital Goods, Cement, and Automobiles etc have lead to complete slowdown in new investments. Oil and Gas has been hit by policy uncertainty. No fresh investments are happening in refining, petrochemicals, pipelines etc. Most sectors except for the infrastructure sectors today have overcapacity which is reflected in the inflation of manufactured products that reflects a complete collapse of pricing power. As such the revival cycle has to be led by revival in consumer & investment sentiment as well as investments in infrastructure projects.
The first steps Huge delays in approvals make projects unviable. The first step towards reviving investments is to clear projects as a rapid pace where the onus should move on the approving authority to show non compliance rather than on the investing company to show compliance.
The land acquisition bill is seen as another death knell for investments, not in terms of cost as actual land prices in most areas are already much higher than collector rates. However the rules are onerous.
Steel & aluminium sector where India is competitive in terms of cost of production and had the potential of attracting huge investments has been hit by iron ore mining ban, coal gate as well as land acquisition & environment clearance issues. Projects are ready to be executed, red tape clearance is required.
PPP projects need relief in terms of tariff relaxations.Power sector IPP’s/UMPP’s relief requirement is of Rs .5-0.75 per unit in most cases miniscule as compared to the peak domestic power rates of Rs 8-10 per unit.
Relaxed Environmental norms-Environment clearances take the maximum time & need to move with a deadline.Most countries that have developed till particular points of time have had relaxed environmental norms. However we have moved towards one of the most stringent norms even at low development level of. Another five years of relaxed environmental norms is not going to kill the country. As they say, Heavens will not fall if we relax environmental regulations for a fixed period till time bound norms are finalized.
Subsidies- The next government will need to deal with fertilizer and fuel price moving to market levels. Though inflationary in the short run it will create a huge investment cycle by making projects in these sectors viable. It will free up huge resources of the government, reduce the fiscal deficit by 1.5% of GDP and eliminate crowding out.
This will reduce domestic interest rates & attract Foreign Capital into the country.Sovereign Rating will in all probability be upgraded & start a virtuous cycle
Road Projects- Road projects are hugely positive for the economy as they generate large employment,require lot of inputs & machinery.The economy around the project sites also gets a big boost.
Last year NHAI could award just 1322 kms as against a target of 9500 kms.Easier exit norms post completion of project combined with proper evaluation of bids can attract lot of Private Equity.An award of 8000-9000 kms of projects pa will lead to an investment cycle of Rs 100,000 pa.
Agriculture – In good times supply constraints have not been worked on especially in the case of agricultural produce where it is estimated that 33% of the perishable produce worth Rs 200000 Cr gets destroyed. Even where the government maintains a buffer as in the case of wheat, pulses and rice wastage is high due to poor storage and distribution.
APMC needs to be made optional and a reduction of the middlemen network is required. There is need to set up food processing units,modern cold storages & transportation networks.The total storage capacity in the country currently is just 30MT. Estimates indicate a requirement of another 37MT requiring an investment of $ 20 billion. It will set the tone for Round 2 of Rural Prosperity which started off with the inefficient NREGA .
Urban Infrastructure Projects- Projects like metros,overhead road/rail networks, water and waste water projects etc are easier to execute as they do not have land acquisition issues. An initial focus on these could contribute strongly to investment revival. For example metro projects in 20 cities would involve a layout of Rs 200000 Crore.
Mining – Investment in Coal Mines is easiest to revive as monetary investments are low.This sector has been the worst hit due to Coalgate and Environmental activism.
Coal imports today exceed $ 10 bn and can be easily replaced by domestic production. It will go a long way in reducing power costs & reviving the economy. Coal India’s monopoly needs to be revoked at the earliest.Coal prices can be benchmarked to global levels and mines opened up to private companies. Similarly Iron ore mining can restart in a big way from 2014 onwards.
To Conclude
India offers one of the best nominal returns to investors in investments across sectors and segments. We can attract huge foreign capital. It is not difficult to revive the investment cycle in a country where there is an actual requirement of better roads, power, urban utilities & all kind of basic amenities etc.
Except for acting on the Fuel & Fertilizer subsidies none of the other steps required are politically unpalatable. We need a revival in investor confidence & a focused approach on awarding & implementing projects.
The economy can revive rapidly; it’s only a question of confidence. A stable external situation & improving fiscal situation should take growth back to the 7-8% range in the next two years.

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