Intent creates hope

But investment revival needs credible policy action

The most recent round to the investment intentions survey carried out by the Centre for Monitoring the Indian Economy (CMIE) provides some positive indications. Intent to invest by companies was about 80 per cent higher in 2014-15 than in the previous year, suggesting a rather significant improvement in the investment climate. In absolute terms, the aggregate planned investments of Rs 9.9 lakh crore were back to levels last seen in 2011-12, although still far below the Rs 22 lakh crore seen in 2008-09, a buoyancy that was undercut by the financial crisis and its aftermath. Were these numbers taken at face value, then they would reinforce the broad story about optimism returning to the corporate sector and its willingness to put money down for new capacity. Ultimately, it is only through a sustained increase in investment that the economy is going to achieve the kind of growth performance that the government is promising.

However, it must be pointed out that these are, as of now, only intentions. Concrete economic outcomes will only materialise when businesses put their money where their mouths are. In translating intentions into actions, two factors will play a significant role. First, the external environment in which business is carried out needs to conform to the assumptions made by businesses intending to invest. There has been much discussion about the massive number of deterrents that businesses face at the central, state and local levels of government. The question is not whether this entire regulatory apparatus is redundant or not. Parts of it are clearly relevant - even critical - to social welfare. The issues are essentially of speed, fairness and transparency. Reports suggest that the commerce ministry is fast-tracking an initiative to significantly improve the ease of doing business at all levels. There must be tangible results - including proposed legal changes - emerging from this, and quickly, for investment intentions to translate into action.

Second, there is the fundamental question of how these investment activities are going to be financed. Some companies may have large cash resources, which they can now deploy into creating new physical assets. But given the relatively weak profitability patterns over the past couple of years, this is not a widespread characteristic. Equity markets are relatively buoyant, but there is as yet little visibility on public offerings, initial or follow-on. This suggests that neither are there new companies looking to expand to the next level through equity issuance, nor are existing companies going down this route. Intentions of the magnitude reported by the survey will unquestionably require significant external funding. That leaves borrowing from banks. The banking sector has been particularly hobbled by the serious build-up of non-performing assets, which has made it quite reluctant to lend any more to risky borrowers, into which category most of the companies articulating investment intentions would fall. In short, there is little sign so far of the financial sector responding to this impending surge in investment activity.

Positive outlooks are the first requirement of an investment recovery and the reassuring indication from the survey is that these seem to be spreading. But to convert intent into action, they need to be reinforced by credible policy actions. More of the latter are needed.