The year that just passed, 2017, did not enthuse industry or governments to propose a credible level of new investments. The year ended with new investment proposals worth `8 trillion. This is likely to be revised upwards to about Rs 10 trillion as some information will get updated in the coming weeks or even a few months. In comparison, 2015 and 2016 each witnessed investment proposals worth about Rs 15 trillion. In 2014, these were even higher, at Rs 16 trillion.
Adjusted for inflation, investments during the current government’s regime are lower than in the worst years of UPA II. Hopefully, 2017 will go down in history as the worst year in so far as enterprise and government making new investment proposals is concerned. Hopefully, 2018 will be different. Hope is all that we can rely upon because there isn’t enough reason to believe that 2018 would be much different from 2017
It is not entirely the government’s fault for investments being in such bad shape. In fact, the government can take credit for resolving a number of problems that restrained investments during the UPA days.
Last year wasn’t a bad year for financing projects—if there were sufficient projects seeking finance. Banks were flush with funds, thanks to demonetisation. But, they were short of credible investment proposals. The stock markets provided the best possible valuations, but this did not enthuse enough entrepreneurs to raise resources for capex. It did not even enthuse government to encash with an aggressive disinvestment programme which could have funded higher infrastructure spending.
There weren’t any specific bottlenecks in 2017 like there were during the UPA times, when availability of gas, coal and iron ore was mired in a vortex of problems. Today, all these problems stand resolved. The problem of land acquisition is behind us, and this was a major problem holding back investment during the UPA regime. The present government has also relaxed environmental conditions in some areas. This removes another major impediment of the UPA times.
The year gone by wasn’t bad for governance, either. Central and state governments are known to be quick and effective in taking decisions that are within their ambit and, sometimes, they even stretch to help with other agencies. The prime minister has worked hard to attract investments from overseas.
It is generally believed that, in the top echelons of the government, there is no corruption. This is a big change in perception. In the context of investment climate, substantiation is less material than perception. What matters is that a perception is built around a theme that this government is not corrupt.
So, since, in the past three years and more, we have seen all problems that held back the animal spirits of Indian industrialists go away, then why has industry not enthusiastically and aggressively invested in new capacities? Why was 2017 the worst year in recent times in terms of investment proposals, and why would 2018 be no different?
There are two major reasons. The first is quite well-known, but merits reiteration. Growth in demand is insufficient. Industrial capacities have run far ahead of demand. As a result, capacity utilisation is low. According to RBI’s OBICUS survey, it was 71% as of June 2017 compared to 76% in March 2014 and 83% in March 2011. Capacity utilisation has remained mostly around 71% since 2015. The same survey shows that the average size of new orders has been falling.
Given this low utilisation of capacities and fall in new orders, it would be a bad idea for companies to invest into new capacities. Arguably, it would also be a bad idea for a bank to fund a project in these conditions.
A large part of the investments during the boom times of the UPA government was in the power sector. This accounted for over 30% of total new investments during 2005-06 through 2010-11. But, thanks to those investments and because of a much slower growth in demand, today, we have a situation of almost excess power-generating capacity. Plant load factor was less than 60% in 2016-17 and so far in 2017-18—compared with over 66% in 2013-14 and over 78% in 2007-08 when investments into the sector peaked.
It would be foolhardy to continue to make similar investments in the power sector today.
Industrialists have a good reason to slow down investments. They also have problems to resolve on the NPA front. None of this will change magically in 2018.
The second reason why the investment scenario will not change in 2018 is that the government is evidently too committed to a policy of fiscal prudence. The government seems averse to do anything counter-cyclical to correct the present status of a falling investment ratio. Total central government expenditure increased by 6.7% in 2014-15, 7.6% in 2015-16, 12.5% in 2016-17 and is budgeted to increase by 6.6% in 2017-18. Evidently, in real terms, total central government expenditure has barely increased. In comparison, growth in government expenses during the period 2006-07 through 2010-11 was consistently in double-digits.
The Modi government is correctly focussed on growing capital expenses rather than revenue expenses. Capital expenses and, in particular, investments in infrastructure like roads and railways have been growing well. While the country needs to invest in infrastructure aggressively, its problem is also lack of growth in aggregate demand. The government is disinclined to help in raising aggregate demand to spur increased consumer spending and thereby investments.
It may be a good idea to revisit this fiscal orthodoxy in the coming budgets.
There is also a third reason why investments have become even more muted recently. While this government is perceived to be not-corrupt at the top, it is clearly not friendly to business and to business professionals. Retrospective tax claims have not stopped and the government’s powers to intervene in business have increased. Officials are armed more than in the past to raid and make allegations of malfeasance. The prime minister has himself put accountants in an embarrassing position by talking them down. Perhaps, the drive against corruption needs to be better focussed.
It is easy for the government to overcome the third problem, but it will take immense courage and conviction to deal with the second. These two could mitigate the first problem of insufficient demand growth and overcapacity, slowly, over time. Investments are unlikely to pick up if the economy is left on an autopilot mode.