For those, including RBI, who are still looking for more proof that India?s investment-led growth is shrinking, the latest import data is revealing. Non-oil imports for June have declined by 25%, on top of a 16% negative growth in May. If this trend continues, India will surely end up with a GDP growth of around 6% or even less in the current fiscal as compared with 6.5% in 2011-12.
Prime Minister Manmohan Singh?s reference to animal spirits is really about rescuing the investment story. The Economic Survey of 2010-11 calculates the contribution of investments to the GDP growth during the boom period of 2003 to 2007. When India?s GDP growth peaked in 2007-08 at about 9.3%, over 60% of this growth was contributed by new investments and the rest was driven by consumption. In the GDP growth of 9.3%, roughly 3.5% came from consumption and 5.8% from investment.
Thus, it is clear that the boom period of 8%-plus growth is characterised by investments contributing more to the GDP than consumption. However, as GDP growth dropped to below 7%, as in 2011-12, investment?s contribution shrinks to about 3% to the GDP number. The contribution of consumption remains more or less steady at 3.5-4% even during a downcycle in the GDP growth. So, as growth rate drops to below 7%, it is the investment-led GDP growth that shrinks, as it is happening now.
So, it goes without saying that the investment story needs to be revved up if GDP growth is to come back to 8%-plus over the next three years or so.
Of late, key economic policymakers like Dr C Rangarajan and Montek Singh Ahluwalia have begun to emphasise more on pushing investments already in the pipeline, waiting for various clearances. Many of these investments, in coal mining, railways, ports, airports, roads and energy are in the public-private partnership (PPP) mode where government has a big role as a facilitator.
Both Ahluwalia and Rangarajan, probably articulating Manmohan Singh?s thought process, are rightly playing down the market?s expectation of big-ticket reforms, by suggesting that the need of the hour is to just keep clearing investment proposals already in the pipeline, especially in various PPP projects.
If cleared, these projects can begin to invest in a short three to six months cycle. The government is rightly focusing on these rather than talk in the air about big-ticket reforms which unnecessarily raise the hackles of the ever insecure political class. Sizeable sections of the Congress also appear unconvinced about some of these big reforms agenda. Consequently, it is best that the UPA, given the overall political climate of distrust, focuses just on pushing investments already in the pipeline which can bear fruition in less than six months.
In this regard, just three or four sectors must get special attention. These are energy, telecom, roads and ports. In the energy sector, the government knows exactly what is to be done to facilitate investments in a large number of private sector power projects where investments have fructified but are waiting of coal linkages or gas (both domestic and imported). The promise of facilitating 20 km of road building every day is far from being achieved. The NHAI is struggling at 7 km per day of roads getting constructed. This can be raised to about 14 without any coalition partner or some opposition party member getting upset. No big reform needed here. Similarly, if some pending regulatory issues are sorted out in the port sector, much-needed port capacity can be enhanced very fast. A Cabinet minister recently told me the port capacity constraint is so severe that India may not be able to import its growing coal requirements?of over 150 million tonnes by 2017?if new ports are not built on a war footing. In telecom, the government and regulators need to bring clarity on how the 2G licences are to be re-auctioned in a manner that the balance between consumer surplus, producer surplus and government revenues is optimal. Once this is done, and mergers and acquisition guidelines are put in place, fresh investments in telecom will pour in.
Another sector crying for attention, and where pipeline investments are waiting to happen, is gas exploration, especially in deep sea. A news report last week said petroleum ministry officials made a presentation to Pulok Chatterjee, the principal secretary at the PMO, sounding a big warning that that the non-clearance of blocks already awarded under the New Exploration Licensing Policy (NELP) will lead to an exodus of foreign companies who were invited with the assurance of a conducive investment environment.
Under NELP, so far, the government has allocated rights to explore 249 blocks for oil and gas. Of these, 46 blocks still face approval problems from the ministries of defence, environment, home affairs etc. Some deep sea blocks need clearance from the Indian Navy.
The total investments in exploration have fallen 90% in 2011 compared with what they were in 2007. A global company with expertise in deep sea exploration made a presentation to the government sometime ago suggesting India had 100 trillion cubic feet of recoverable gas in its deep sea basins. The gas itself is worth about $1.5 trillion, which could get extracted over a period of 10 to 15 years. In effect, for about 15 years, India?s energy import bill could potentially be reduced annually by about $100 billion. Our annual oil import bill today is about $140 billion. Why wouldn?t you want to exploit this great opportunity? Especially at a time when India?s humongous oil import bill has contributed to a perilously widening current account deficit, which is making the rupee one of the weakest currencies, way beyond what India?s fundamentals might dictate.
So the question is, do we have a five-year vision on energy production linked to our macro-economic and external sector stability? Time is of essence here. Can this be explained to our political class across the spectrum? Can Prime Minister Manmohan Singh explain this simple economics to his partymen and allies? If this economics is assimilated, then the animal spirits will revive automatically.
mk.venu@expressindia.com