Not for a decade has growth in gross domestic product been as low as it is likely to be this financial year. Finance Minister P Chidambaram now says that it may be in the 5.5-6.0 per cent range; the Reserve Bank’s figure is midway, at 5.7 per cent. More worryingly, while the slowdown has been caused very substantially by a shortfall in investment, there seem to be few sources of recovery on this front. As a series of reports in this newspaper over the last week has shown, the much-needed rebound of investment cannot be financed by big private sector firms, because many of them are heavily laden with debt and in no shape to undertake fresh investment.
Banks have stressed balance sheets, with non-performing assets expected to climb further; the majority of the state-owned banks will need fresh capital injection in the next year or so. As for foreign investment, fresh inflows are likely to be hit by several unresolved questions that undermine confidence in macroeconomic management. This is because sectoral policy and other constraints continue. Finally, given the level of inflation, monetary policy cannot step in to help by lowering the cost of capital; even at current rates of interest, bank deposit growth has gone slack — and this will affect banks’ ability to maintain the tempo of lending. Under such circumstances, the government is the last line of defence. But years of excessive spending on the part of the United Progressive Alliance leave it with no option other than to be pro-cyclically contractionary in its stated fiscal stance (the reality may, of course, turn out to be different). What this combination of factors spells out is that it will not be easy to take the economy’s growth rate back to even the 6.5 per cent that was achieved last year, and which is also the base case scenario for the 12th Five-Year Plan (2012-17).
The Planning Commission had initially postulated infrastructure investment totalling $1 trillion during the 12th Plan. That figure was lowered to $800 billion. But the bulk of even a reduced outlay is expected to come from the private sector, raising two sets of questions. One concerns the government’s inability to clear the roadblocks in the way of infrastructure investment: the power sector’s coal supply problems are still to be sorted out; the steel sector faces challenges in getting iron ore as raw material; and the crisis over gas supply, which affects both power and fertiliser, is unlikely to be resolved soon. The new land and mining laws are unlikely to see the light of day before next year, if that.
The second set of issues concerns the problems plaguing public-private partnerships, with many of them coming under scrutiny and question. One could add that the growth sectors of the past are no longer in a position to lead the charge, with telecom being the obvious example. It is possible that some of these issues can be addressed through the proposed device of a National Investment Board, but discussion within the government continues on how such a Board will function, given the questions that have been raised by the ministers in charge of the environment and tribal affairs. In other words, while money is a primary constraint standing in the way of a revival of investment, it is by no means the only one.
