One of the most serious challenges being faced by the Indian manufacturing sector now is the drying up of fresh investment.
Lack of fresh investment has been identified as the single-most critical factor that pulls the growth rate down.
A consistent 48% share of investment in the GDP has helped China achieve an average growth, exceeding 9.3% in last 5 years, while a 35.7% share of investment in the GDP has enabled India obtain an average GDP of 6.5% in last 5 years.
This is not to imply that there are no other factors responsible for GDP growth.
But it is extremely important to look into the reasons as to why investment is not happening in the economy despite all the prodding by the Prime Minister, finance minister and the RBI governor.
Had all the cash-rich PSUs and some of the major private sectors invested as per plan, the positive impact on GDP would have been enormous.
It is therefore quite possible that the perception about the future, both immediate and long term, is different by different groups.
In a recent seminar, a foreign delegate mentioned about the sheer number of procedural clearances required in this country for an industrial investment to take place that only goes to enhance project cost and time.
We lament over the slowing down of FDI flow and our poor record in ranking in doing business has brought out the fact that many of the bottlenecks could be rectified by ourselves only.
In some of the government-monitored schemes relating to rural entrepreneurs, small and tiny enterprises, the loans sanctioned as investment in buying machineries and equipment could not be given to them as the bank authorities perceive that the inability by the beneficiaries to repay the credit may escalate their NPAs.
Recent studies in the US as reported in the Economist have empirically proved an inverse relationship between an uncertain future and investment (for every 10 point rise in volatility, investment drops by 1%). Some of the doubtful factors are beyond the control of the investors as well as the state, but a handful of them can be cured by policy reforms that would assuage the doubtful Tom and entreat him to invest for future return.
In many of our critical sectors dominated by the government, the uncertainty evaluation is different than what is perceived by the Board of a PSU that weighs the volatility factor in its impact on gloss of competitiveness like any other private entrepreneur.
Our official statistics indicate that a good number of mega projects worth exceeding Rs 1,000 crore each are stalled leading to cost and time overruns.
These constraining factors such as raw material availability and cost of inputs, mining restrictions, demand contraction in consuming sectors, inflation, exchange rates and project clearance hurdles enhance the fear of uncertainty. At the end of it, each investor looks up to an invisible helping hand to clear the air of uncertainty to commence investment.
The author is DG, Institute of Steel Growth and Development. The views expressed are personal