Pause in private investment: A cause of serious concern for Modi government

Pratim Ranjan Bose

(An edited version of this blogpost was carried by Financial Express, Dhaka on September 24, 2016.) 

This is bad. I didn’t write blog for three months. Surely I wasn’t idling around. May be I was too busy with too many projects or problems in hand. But the bottom line is, I failed at least on this occasion, blog writing. And that’s exactly the case with the Prime Minister Narendra Modi. 

The parallel is contextual. Ever since, he has assumed power, nearly two and a half years ago, Modi’s NDA government is working tirelessly to tie too many loose ends in the system, left behind by his predecessor, Manmohan Singh of UPA but, he had failed to turn the wheel of investment. 

Financial Express, Dhaka on September 24, 2016

No grenfield investment

Except some mergers and acquisitions, mobile handset assembling, and a host of promises especially from a over-leveraged infrastructure major, there is a near complete pause in private greenfield investment in the economy that is so crucial to lift the industrial production and employment numbers. 

As in July the industrial growth was down to 2.1 per cent, almost half of the same period in the previous year. Electricity is selling at exchanges merely Rs 1.5 a unit (round-the-clock average) or 2 US cents, that doesn’t even recover the converting coal into power. Naturally, coal demand remained flat during the April-August period. 

Some estimates say 20 per cent of the country’s cement manufacturing capacity is unutilized but my guess is capacity utilization is ruling lower. The situation is no better with the steel sector that finds it hard to survive a huge overcapacity in China and the resulting cheap imports. 

After imposition of safeguard duty (for HR coils) and minimum import price (for long) price realization of flat products increased last month. But the prices are still not enough to make profits. But long product price realization is down and thr producers are staring at higher losses this year. 

Screen shot: Financial Express Dhaka, September 24, 201

None of these points at arrivals of good times, as Modi promised. Neither he is responsible for the global meltdown or instability, of a scale that the world hasn’t seen before, that is majorly impacting the industrial performance of India. 

The scene is a few times worse in China. But they operate on a larger scale and has the comfort of sitting on a cash pile created during the three decade long robust export growth. On the contrary, India had a $118 billion trade deficit in 2015-16, nearly half of it is with China. 

And, that tells you a story about years of failure in pushing manufacturing growth (and hyping the consumption led growth) which is not easy to recover. 

Work-in progress

The efforts taken by Modi started yielding results in many areas. 

A BusinessLinestudy says mobile handset manufacturing for example has doubled in last twoyears. Strict imposition of domestic sourcing quota triggered movement among foreign military hardware producers to set up base in India. 

Systemic hazards created by the previous government in pushing the road infrastructure sector are cleared. Highway construction has started moving again this fiscal. Earthmover equipment industry reports a pick-up in demand in January-June period after a gap of nearly four years. But it is yet to touch 2011 high. 

To create momentum the government is pushing the State-owned companies in investing unutilized cash in asset creation. Some of them like Coal India which was sitting on a pile of idle cash was forced to share the booty with the owner to help implementation of infrastructure projects (many or most of which were initiated by the first BJP-led  government during 1998-2004 and were allowed to rot by the UPA), on a mission mode. 

The changing geopolitics required the government to put up a strong image beyond the national boundaries. It has gone on high spending mode in creating infrastructure - especially road, port, rail and power infrastructure - in Bhutan, Bangladesh, India, Nepal sub-region and the CLMV (Cambodia, Laos, Myanmar, Vietnam) and, West and central Asia.  

Once again many of these proposals were initiated a decade ago and UPA lacked the enthusiasm in implementing it, impacting India’s image. It is no splurge either. In the prevailing situation, it is a dire necessity or India’s growth aspirations will be tamed forever. 

Moreover, a good part of this spend is actually creating demand for Indian industry. The Garden Reach Shipbuilders (GRSE), in Kolkata, for example, is making hay on orders from Vietnam navy utilising Indian line of credit. Similarly, the push for rail/road connectivity with Bangladesh is creating demand for Indian infrastructure sector. 

The push for Chabahar port (Iran) construction or the participation in North-South multi-modal corridor connecting Bandar Abbas (Iran) with St Petersburg (Russia) is bound to expand India’s trade map to vast parts of central Asia. 

The moot point is all these initiatives, coupled with path-breaking tax reforms (Goods and services tax) - which was in discussion mode since 2000 – coupled with the corruption-free image of the government (in contrast to a corruption-ridden UPA) should create new growth opportunities for Indian industry. 

Urgent remedy required 

The problem is common voters have little interest in long-term remedies, more so when Modi himself fuelled their aspiration by promising Achhe Din round the corner and, they may now get restless. 

In a democracy ridden with regionalism or fiefdoms, long-term vision is often sacrificed for short-term gains. We have seen that in the unceremonious exits of two of the best governments in last 25 years, one was led by P V Narasimha Rao of Congress and the other by Atal Bihari Vajpayee. 

Rao was an ardent follower of the great Chinese leader Den Xiaoping and brought the country economic freedom. Except for a GST, he was the architect of a majority of the broad-spectrum reforms that the country witnessed so far. To me, he is the father of a modern India. 

Vajpayee pursued Rao’s dream to the maximum extent. If we have any world class infrastructure today in road, port and power sector, the credit goes to him. I don’t think any other Prime Minister realised the importance of connectivity - right from the village, inter-state to international levels - better than him. Be it rural roads or the India-Myanmar-Thailand Trilateral Highway connecting ASEAN, he contributed the most in making India a geopolitical rival of China. 

Yet he didn’t get a second chance. And, that’s democracy, or Indian democracy, unfortunately. Modi may keep that in mind and think of confidence-building among the cash-rich industrial houses in India. 

***