Credit Suisse: Investment cycle revival at least 3-4 yrs away

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SummaryCredit Suisse has said the impact of recent reforms will have no impact on the investment cycle at least in next 3-4 years as the past eight years have "sapped the energy out of the economy".

Credit Suisse has said the impact of recent reforms will have no impact on the investment cycle at least in next 3-4 years as the past eight years have "sapped the energy out of the economy".

Investments worth a whopping Rs 10 lakh crore have been stalled in the past many years due to a complete policy inertia and lack of regulatory, primarily forest, approvals, it said.

However, since September 13, the Finance Ministry under P Chidambaram has unveiled a slew of key reform initiatives on the subsidy and foreign direct investment fronts such as hiking diesel price and capping subsidised cooking gas apart from allowing FDI in key retail trade, power, media sectors among others.

Lauding the latest proposal to set up a National Investment Board, which will act a super-structure when it comes to large investment proposals, it said if the proposal fructifies it will be one of the most effective reform measures.

Stating that the impact of the recent administrative changes, the brokerage said, "the changes are encouraging as they have put the worryingly anti-business political rhetoric firmly behind us and pulled back economy back from a precipice."

But the report says, "it can take six to eight years from reform intent to economic impact, and investment cycle is unlikely to recover at least for the next three to four years as a complete lull in the reform momentum seen in the past eight years has sapped the energy out of the economy."

Significantly, it also said the reform momentum isn't hostage to how long this government lasts, as policy-making by and large is independent of who is in power.

"Even the oft-discussed fiscal consolidation is unlikely to come about until the economy reaccelerates as historically the government's walk usually differs from the talk," it said.

Credit Suisse said all but three of the 112 pending Bills have either low probability or low economic impact, and the secular decline in Parliamentary and legislative activity compounds the issue.

Assessing each of the proposed reforms on three parameters such as the likelihood, the economic impact, and time for the impact to be felt, the report says, "Our analysis suggests all but three of 112 Bills--the FCRA Amendment, GST and National Investment Board (NIB)-- currently pending in Parliament have either low probability or low economic impact."

On the NIB, which is perceived to be one of the most ambitious administrative reform initiatives proposed by the government, it said will empower the Cabinet as it will have the mandate to expedite large infrastructure projects.

It also said that a whopping Rs 10 trillion worth projects are stuck pending clearances, most in the power, petroleum and steel sectors, constituting 70 per cent of all delayed big-ticket projects.

Stating that the earlier Cabinet Committee on Infrastructure formed in July 2009 or the various empowered groups of ministers did not have the desired impact, it said "the very fact that an NIB is now being proposed suggests these have only been partly successful. It is thus important to know how the NIB is different."

It further says, its worries on the efficacy of the NIB arise from the fact that the proposed super body will have no authority over state or district administrations.

Thus, while NIB will add certainty to projects, it will not drastically speed up the pace of implementation as other impeding factors will continue to prevail.

To analyse the impact of the past two decades of reforms and their economic impacts, the brokerage has looked at all the major reform measures since 1991 and also the past 22 Budget speeches.

"We have re-discovered how dramatically the economy has changed--de-licensing and de-reservation; import duties cut from 78 per cent to 7 per cent; NPAs down from 26 per cent in 1992 to 2.5 per cent as of FY12; import licences and dual exchange rates to open current account," says the report.

Accordingly, since the 1991 reforms, GDP growth accelerated from an average of 5.6 per cent in the 1980s to 6 per cent in the 1990s and then 8 per cent in the 2000s.

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