A recent report by IMF has established that private corporate investment in India has been adversely impacted by volatility in inflation, liquidity, profitability and above all by the business environment in the post-Lehman periods (September 2008).
That price volatility shaking the behaviour of the investors is nothing new. This and real interest rate have been found to be statistically significant factors to dampen corporate investment.
Corporate sector in India since 2008 has taken a cautious approach in ploughing back investment whose growth rate had sharply fallen from 24% in 2009-10 to 8% in 2010-11 and finally to 5.3% in 2011-12. Talking of business environment, the World Bank in its latest report on Cost of Doing Business has ranked India at 132 out of a total of 183 countries. Private corporate is shaky as India continues to remain a laggard in terms of starting a business, time taken for entering into a contract, labour reforms and similar other factors relating to setting up a business venture.
Most of these aspects are largely dependent on appropriate government policies. Immediately after CRR cut by 75 basis points enhancing liquidity by about R48,000 crores, RBI must reduce interest rate to stimulate demand for credit. While domestic market did not offer attractive locations to engage funds, Indian corporates have invested heavily in taking over ailing industries abroad.
During 2008-11 an estimated amount of $13bn has been invested by mega investors like Tata and, Bharti Airtel. This follows Tata Corus and Hindalco investment of around $19.5 bn in the previous years. Mining resources of coal and iron ore in South Africa, Bolivia, Mozambique, Guinea, Mongolia, Australia, and Indonesia have brought in massive investment from Indian industry with long term prospects. In other areas, Aditya Birla, Mahindra & Mahindra have also put in substantial capital.
Thus, it is not the paucity of funds but the relative prospects of getting a reasonable return of the money invested that has prompted the private investors to look beyond the domestic boundaries. Unfortunately, other than the big ticket investment of Tata Motors, the return on capital for other ventures is negligible.
As Indian economy in the current shape must be investment-led in order to achieve a 7-8% growth consistently for the next few years, the business environment is to exhibit a paradigm shift from uncertainty and scepticism
to pragmatic and effective activities.
Arcelor Mittal, one of the most successful industrial entrepreneur in the recent period, while closing mills in Spain, France and postponing investment in Brazil, is also revisiting India as a prospective ground for fresh investment and thereby reposing faith in Indian business scene as it unfolds in the coming months. The industry can only look for an appropriate policy support from the government. Let the Budget day initiate the grand proceedings.
The author is DG, Institute of Steel Growth and Development. The views expressed are personal