Clearing clouds over foreign inflows

Written by Santosh Tiwari | Updated: Nov 12 2013, 11:19am hrs
The UPA-2 has about six months left to improve its record on the economic front as, in all likelihood, it will complete its full five-year term in May 2014. The chances of an early Lok Sabha poll are now remote with the assembly elections in five states, including Delhi, Rajasthan and Madhya Pradesh, finishing only on December 8.

It is not feasible for the government to take any major policy decision or get any major legislation passed in Parliament during this periodthe Winter session has already been curtailed to 15 days due to the assembly elections and will be held from December 5 to December 20. Though there is a possibility of the Direct Taxes Code (DTC) Bill being brought in the Winter session, it is unlikely to be passed, and this is the most that the government can do as far as legislative business is concerned. So, the focus now is entirely on doing whatever is possible to perk up the investment scenario.

Total FDI inflows into the country rose from $4 billion in FY01 to about $9 billion in FY06 and then jumped to $22.8 billion in FY07, $41.87 billion in FY09 and then to $46.55 billion in FY12. In the first five months of the current financial year, however, FDI inflows have been only about $13 billion as against $36.86 billion in FY13. The FII investments also increased from $1.8 billion in FY01 to $29 billion each in FY10 and FY11, but during April-November 7 in the current financial year, they were (-)$4.3 billion as compared to $27.58 billion in FY13. This situation needs to be remedied fast if the picture has to get better from here, by the end of the financial year.

The worrying bit is that the US QE taper fears could make this task even tougher. On its part, the finance ministry is not taking any chances. While economic affairs secretary Arvind Mayaram is slated to address a global investors meet this week, finance minister P Chidambaram is set to outline the 'India atmosphere' to the CEOs of financial institutions early next week. With foreign banks and institutions keen on making their projections about the likely economic scenario post-elections, these interactions would be a window of opportunity to look at administrative measures for attracting foreign investment and allaying unnecessary fears.

What favours the government is that there are reasons for the investment climate to look up, though not as strong as requiredthe good monsoon this year is set to raise rural demand in the coming months, which in turn will help growth prospects; exports have also been showing better growth now; the core sector is showing signs of a pick-up and the threatening current account deficit now looks to be under control and could be at $60 billion at the end of the financial year as against the projected near-$80 billion when the rupee was running high and gold import was failing to ebb despite duty hikes and curbs. The finance minister has also made it clear that the fiscal deficit 'red line' will not be crossed. Though this may not be an easy task and the finance ministry will have to ultimately resort to the accounting jugglery to keep fiscal deficit at 4.8% of GDP, it will certainly provide a temporary respite from downgrade by the rating agencies. All this may ultimately help in keeping the growth rate in FY14 at close to 5% like the previous year.

All told, it is quite late in the day to correct the damage done to the investment scenario due to the policy flip-flops and unending corruption charges in the last two-three years, compounded by the global economic downturn. But the finance minister is right in pointing out that there is a need to get over the 'high degree of negativity' created by these developments.

However, the situation on the domestic investment front has to improve first. Besides speedy clearances of the infrastructure projects by the Cabinet Committee on Investments, the finance ministry has also started pushing the public-private partnership (PPP) projects which have failed to take-off even in sectors like roads and highways. The Centre has now started pushing regional integrated manufacturing zones (RIMZs) through the PPP mode. The finance ministry held discussions with the representatives of the state governments last week to expedite the creation of such zones. There is also a renewed effort to encourage infrastructure projects in the PPP mode at the state level.

Another segment which is currently being looked at is power generation. The bidding process for the two ultra mega power projects (UMPPs) in Tamil Nadu and Odisha has already started, and if all goes as per the plan, these two projects would be awarded by February next year. Going by the preparation level for these projects, power ministry officials say these can take off within six months of being awarded. If this happens then, combined with the new bidding norms for other projects which also provide for pass-through of additional fuel costs in the power purchase agreement, the sector can witness rise in investments. All these steps would help but the real challenge would be sustaining the tempo as the 2014 general elections draw closer.