Projects on hand can more than double the current jobs in the factory sector and raise GDP by half — if only we can find the land for them, says Mahesh Vyas
Fears that the investments boom that began in 2004 would be decimated by the global liquidity crisis have been proved wrong. Implementation of projects to create new capacities did slow down briefly after the eruption of the crisis in September 2008. However, the implementation resumed soon and new capacities are being added again at a hectic pace. According to CMIE’s CapEx database, investments worth Rs 180,000 crore were commissioned during the six months immediately after the crisis — that is, from October 2008 to March 2009. This is broadly in line with the recent trend of project commissionings.
CMIE’s CapEx database showed a new source of possible fatigue in the investment cycle when in the quarter from April to June 2009, the new investment proposals announced dropped dramatically. They fell to Rs 170,000 crore in this first quarter of 2009-10. This was the lowest new investment announced during a quarter in the past 16 quarters. This abrupt fall was inexplicable as companies were reporting good progress in the implementation and completion of projects on hand. Was this, therefore, the beginning of the end of the investment boom cycle?
Although CMIE’s CapEx monitoring is over three decades old, it has been creating a systematic and regular quarterly database of investments only since 1995. Thus, this database is too young to spot investment cycles. And, there is no other database of this kind available in the country to spot investment cycles either. Therefore, any inference drawn from a single observation of the fall in new proposals in April-June 2009 was not much more than a conjecture.
| ON A ROLL Investment projects | |||
| New announcements (Rs Crore) | Completed during the year (Rs Crore) | Shelved during the year (Rs Crore) | |
| 1995-96 | 384,265 | 64,312 | 98,740 |
| 1996-97 | 281,774 | 49,535 | 86,944 |
| 1997-98 | 168,093 | 64,774 | 88,476 |
| 1998-99 | 186,080 | 73,667 | 81,980 |
| 1999-00 | 274,233 | 103,168 | 84,967 |
| 2000-01 | 217,555 | 72,462 | 64,371 |
| 2001-02 | 182,679 | 90,078 | 88,815 |
| 2002-03 | 179,618 | 63,784 | 148,396 |
| 2003-04 | 218,259 | 62,700 | 74,166 |
| 2004-05 | 371,036 | 90,104 | 8,728 |
| 2005-06 | 789,882 | 115,845 | 21,581 |
| 2006-07 | 1,518,614 | 174,340 | 43,199 |
| 2007-08 | 1,766,935 | 225,374 | 59,936 |
| 2008-09 | 2,274,375 | 280,837 | 140,200 |
| April-September | |||
| 2008-09 | 1,024,565 | 101,840 | 44,242 |
| 2009-10 | 495,802 | 139,792 | 18,704 |
| Source: CapEx, CMIE | |||
We may have to wait much longer for the CapEx database time series to grow to spot investment cycles and estimate the length of a cycle, its troughs and peaks etc. In the meanwhile, the database has settled the question of whether the current boom has petered out.
New investment proposals shot up to Rs 330,000 crore in the quarter ended September 2009. This level of new investment is in line with the new investment proposals seen in the past four years. This increase was not because of some politically managed show (such as in Gujarat) to announce investments that mostly do not survive beyond such events. Nor was it concentrated in one particular month or on just a few projects. Further, observations carried out in October indicate that the investments boom continues to roll on.
Confidence in the Indian economy’s growth is intact — not merely by FIIs who may influence valuations merely by their arrival, but by entrepreneurs who are willing to put their monies into creating new capacities. Given this sustained interest of the entrepreneurs in building new capacities in India, what should our policy stance be?
Also Read
First, we need to recognise that entrepreneurs consider India to be a good bet. They have a healthy balance sheet, efficient operations, and funds to finance a good portion of their investments. Profit margins are high and consumer demand is growing at a healthy pace. Net profit margins were higher than 8 per cent in the June 2009 quarter and car and two-wheeler sales are growing at jaw-dropping rates. Housing sales have picked up too and reports indicate that Diwali sales were good this year.
Given this profitable and expanding market and financial strength of corporate India, growth in investments is natural. A study done by CMIE based on a primary survey conducted in 2001 for the Department of Industrial Policy and Promotion to understand the problems in implementation of investment projects (seen in CMIE’s CapEx database) revealed that the most important problem faced by companies was demand. Profit margins were low (around 2 per cent) then and consumer demand was poor.
The situation is different today. The current growth in investments has its own momentum in growth in profits. It does not need any tax sops. Companies will always demand tax sops but, currently, they do not need them. This is the right time to ease out tax sops for investments. SEZs are a good place to begin.
Besides, we need policy interventions to address the greatest bottleneck to investments today — That is, procurement of land. The land requirement has increased as the number of investments has risen in minerals and manufacturing industries. The size of the projects has increased and with this, the need for land has shot up. But, land acquisition laws have not changed to meet the needs of this new phase of development. On the other hand, as democracy has matured, landowners have become aware of the value of their assets. I do not believe that land is an emotional issue any more. It is an economic and financial issue that can be solved through laws that enable a fair commercial transaction without state interventions for unilateral land procurement.
Finally, we need to understand the importance of the current investments boom. According to the CapEx database, the total outstanding investment on hand in the 14,113 projects announced, proposed or being implemented is of the order of Rs 90,50,000 crore. Upon completion, these projects would generate employment and income of a massive scale. A study done by CMIE for the World Bank in 2007 revealed that the 470-odd projects that were on hand in the state of Orissa then, were capable of generating an income in 2013 that would be 2.3 times the state’s income in 2004-05. The additional employment generation would be twice the total employment in the industrial sector in Orissa in 2004-05.
The 470-odd projects in Orissa in 2007 entailed an investment of Rs 560,000 crore. In six years, these were expected to generate an income of Rs 140,000 crore and employment of 1.2 million persons. If we use these proportions at an all-India level, we get a rough idea of the importance of the current investment boom.
An extrapolation of the Orissa work implies that in six years the current investments on hand can generate income of Rs 23,00,000 crore per annum and provide employment to 20.2 million persons. This income is 50 per cent of the country’s GDP in 2008-09 and the employment is 2.4 times the total employment in the factory sector in 2004-05. This growth potential is too important to let the implementation of a significant portion of this be dragged because we cannot find a viable solution to use of land.
The author is Managing Director and CEO of Centre for Monitoring Indian Economy.