Budget 2016 is just round the corner and one thing that should be worrying our policy makers in North Block is the stalling of private investments into the economy.
The Mid-Year Economic Analysis recently released by the finance ministry has lowered projections for GDP growth in FY16 to 7-7.5 per cent, from 8.1-8.5 per cent. One of the main reasons for this continuing stalled private investment, which hasn't seen a restart since the bleak days of 2012-13, is scams and economic mismanagement, which took investor sentiment to its lowest ever.
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The Indian economy is currently being driven largely by public spending and private consumption - of which public spending will start hitting fiscal walls, and therefore, has limited headroom. The World Bank reports that private investment in India reached a 10-year low in the first half of 2015 as the country fell out of the top five countries globally. If the trends and signals from the core sectors are to be believed, private investment shows very little signs of picking up during this year.
There's no doubt that high debt and low profitability are crippling corporate India. Nearly a fifth of India's corporate sector reported sub-debt service levels of profits in the last financial year. This, combined with continued moderate-to-high risk aversion, is putting the brakes on efforts to restart the investment cycle. Stalling of important reforms like GST in Parliament haven't helped either.
This risk aversion, which has its roots in the chaotic slide of our economy in the last half of the UPA government, has not been adequately addressed. While efforts such as Ease of Doing Business and other efforts by the prime minister and the government to restore investor confidence have helped improve overall sentiment, the lack of visible structural reforms and policy action in various sectors continued to make investors wait and watch, instead of writing the investment cheques and restarting the investment cycle.
A HSBC research note on the investment cycle has pointed out that government policy action in land acquisition, environmental clearances and availability of fuel, raw material and supply problems were the biggest factors behind stalled projects. According to the Centre for Monitoring Indian Economy (CMIE), stalled private sector infrastructure projects stood at about Rs 16,500 crore in the October-December 2015 quarter.
Key action areas for the government to focus on include:
Reform the banking sector
The Indian economy's Achilles heel continues to be the public sector banking (PSB) system and its high NPAs. A report by Macquarie Research - Apocalypse Now - states that several potentially non-performing accounts are being hidden behind the screen of statutory debt restructuring (SDR) and 5/25 refinancing. It adds that 16-18 per cent of the total loan book could become sources of stress over the next three to four years. As of September 2015, only 11.5 per cent of loans had been recognised as stressed. These are extremely worrying figures.
I have long been advocating, in both Parliament and outside, the need for urgent banking sector reforms - deep and structural. The finance ministry, in August last year, did come up with a seven-pronged strategy called 'Indradhanush' to revive PSBs, covering appointments, bank board bureaus, capitalisation, de-stressing PSBs, empowerment, framework of accountability and governance reforms. This transformation needs to be speeded up. Cleaning out bad loans from the system would provide an impetus to the economy, enabling it to infuse more liquidity in the market.
A strong bankruptcy law is also needed. It is important that banks have sufficient power to get their money back without being trapped in judicial processes, which many wilful defaulters hide behind. The bankruptcy law can also allow greater leeway including sale of whole or part of a company and change of management or promoter, to revive distressed assets. As per the recent Doing Business, 2016 Report, India is ranked 130 on ease of doing business and at 136 for resolving insolvencies. An effective bankruptcy law would help ensure efficient allocation of funds and greater availability of capital for businesses by freeing up capital, which in turn would fuel economic activity and bolster innovation. I hope the Bankruptcy Code Bill will get passed in the upcoming Budget Session of Parliament.
Revive public private partnerships
One way to get private capital flows to restart is the PPP model. In the past, PPPs had become a smokescreen for private profiteering. A new framework based on transparency and equitable returns to public and private shareholders is needed soon. The recent Kelkar Committee report on reviving PPPs makes sound recommendations to overhaul the PPP model and reaffirms my views, especially on the need for strong and independent regulators. This needs to be finalised at the earliest so that PPPs can boom in a sounder, more transparent framework. A clear and transparent contractual framework also is good for genuine investors who do not need to face the risk of future reviews and pressures as governments change.
The government must quickly set up a National Facilitation Committee for the resolution of prickly project issues, as recommended by the Kelkar Committee.
Strengthen independent regulatory institutions
This is an important signalling requirement for investors that seek to invest in projects that will have life spans across various government terms. Investors want policy making and regulatory action that is consistent and sound across infrastructure, technology and 'Make in India' - as we seek out FDI, FDI looks for clean, clear regulation and policy making. Therefore, rebuilding and/or enhancing the capacities of our independent regulators will be a powerful beacon to investors. However, regulatory reforms do not seem to figure high on the government's agenda.
In a Parliamentary question during Parliament's last Winter Session, I had asked the government whether it is reviewing the performance of independent regulators across all sectors. The answer I received was a bland 'No'. Given patchy regulatory performance like FSSAI's Maggi ban fiasco, Trai's net neutrality flip-flops and others, this is not the answer investors want to hear. To get global investors, we need regulatory institutions that meet global standards. This requires deep changes, ranging from better oversight and financial independence, to clarity of roles and separation from administrative ministries.
After two years of a benign external environment, there is a perception that potential headwinds may show up in the global economy. To continue our growth in that backdrop, we have to focus this Budget on restarting the private investment cycle.
The writer is a Member of Parliament.
rajeev.c@nic.in
rajeev.c@nic.in
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