Under the Joint Auspices of
India Inc all pumped Up
Domestic and export demand along with
a conducive investment climate are triggering heavy duty action in the country.
Big ticket investments are pouring in manufacturing, energy and infrastructure,
steel, aluminium and electrical equipment sectors. What’s more, states
like Orissa, West Bengal and Chattisgarh have become the new investment hotspots.
CAPITAL investments in India
are on the rise, which is yet another indication of surging industrial activity
in the country. Since January this year, there has been a sustained increase
in actual and intended investments, fuelled by a buoyant growth in domestic
and export demand. In FY04-05, as many as 5,649 investment proposals amounting
to Rs 2,94,091 crore were
announced. This is nearly double the amount of investments proposed in FY03-04.
Heavy investment plans in manufacturing, energy and infrastructure, steel,
aluminium and electrical equipment have been the major propellers in recent
months.
Statewise, while Andhra Pradesh, Gujarat and Maharashtra together continue
to hold around 23% of the total outstanding project investments, their significance
has waned in the last couple of years. These states are now being replaced
by Orissa, West Bengal, and Chattisgarh as the new investment hot spots. Increasingly,
companies are pouring investments into Orissa and Chattisgarh to tap their
vast resources in minerals and metals. In West Bengal, the government’s
efforts to build a conducive environment for private investors are finally
showing results. Interestingly, project investments in Bihar witnessed the
highest year-on-year growth rate of around 60% with projects amounting to
around Rs 51,000 crore as of June ’05.
The increase in capital investments is in sync with the overall growth in
the industry shown by record growth rates in the Index for Industrial Production
(IIP). The recent surge in industrial activity is largely attributed to the
manufacturing sector. As manufacturing output continues to grow by more than
12% in the previous months, projects under implementation in this sector also
grew by nearly 32% in the previous quarter.
According to CMIE, projects amounting to Rs 8,13,648 crore were under implementation
as of June ’05. While the services sector, including utilities, continues
to hold the largest share of around 32%, the share of manufacturing has been
creeping up from around 16% in June ’03 to 19% last quarter.
The recent survey by Projects Today
clearly points to a large infusion of investments in steel, aluminium, energy
and infrastructure in the coming months. In the aluminium sector alone, Hindalco
is planning to pump in around Rs 11,000 crore in Orissa and another Rs 7,800
crore in Jharkhand, while Dubai Aluminum is injecting Rs 5,000 crore in Orissa.
In the steel sector, Essar Steel, Tube investments and Jindal Vijaynagar Steel
have announced some big investment plans. Reliance has already announced its
expansion of the Jamnagar refinery amounting to a whopping Rs 25,000 crore,
one of the largest investment plans in recent months. In the energy sector,
NTPC and Andhra Pradesh Power Generation Cooperation have chalked out some
large-scale investment projects. Metallurgical industries, electrical equipment
and sugar have emerged as the other major sectors, where investments are slated
to flow in the coming months.
One of the key triggers of the growth in actual and intended investments has
been an improved investment climate within the country. According to a report
by the World Bank, India made the highest progress among the South Asian nations
in improving its investment climate last year and was among the top ten reformers
in the world. Moreover, at the macro-economic level, a buoyant domestic and
export demand and soft interest rates in India and abroad have fuelled the
investment demand further.
Interestingly, both the central government and the private sector have shown
an equally strong growth, averaging 19% each in projects under implementation
since the beginning of this calendar year. The central government continues
to hold the largest share of around 38% of projects under execution, while
the private sector is not far behind with 33% share. Investments by government
local bodies, however, have been declining by more than 10% since the past
two quarters. While the share of state governments is around 25%, it is growing
at a snail’s pace of an average of 3% in the past few quarters.
The growing business confidence in India is clearly reflected from the investment
intentions of private and public sector, announced through the Industrial
Entrepreneurial Memorandum (IEM) and the Letter of Intent (LOI). In January-March
this year, 1,561 investment proposals amounting to Rs 71,600 crore have already
been filed through IEMs. In terms of proposed investments through IEMs in
FY04-05, Tamil Nadu clearly emerges as the winner with proposed investments
of Rs 54,107 crore. This is followed by Chattisgarh with Rs 47,600 crore and
Orissa with Rs 45,565 of IEMs filed.
A sustained growth in domestic investments especially in infrastructure-related
activities spells great news for the economy, especially at a time when the
country seeks to attract foreign investments to bridge the $150bn gap required
in infrastructure. This time around, both the public and private sectors have
propelled growth in domestic investments.
This is also evident from the fact that gross capital formation in the country
grew from 24.8% in ’02-03 to 26.3% in ’03-04, contributed by an
increase in public investments by 5.6% and private investments by 4.5% in
’03-04. When it comes to sources of funds for the industry, there has
been a marked increase in non-food bank credit as well as in public issues
and external commercial borrowings by the industry.
FDIs have also begun to play an increasingly important role in financing of
investments, though their overall contribution is still low compared to the
other sources. While there has been a high growth of around 46% in ECBs, domestic
public issues have also shown a healthy
year-on-year growth of 26%. There is, therefore, an increase in flow of funds
across the board for financing investments.
The link between public investment and GDP growth is not automatic. High-quality
investment will unquestionably spur growth, but India has a long history of
poor-quality public investment, laments Swaminathan S Anklesaria Aiyar
PRIME Minister Manmohan Singh wants to harness our huge foreign exchange reserves
(almost $120 billion) to accelerate development. One idea for achieving this
is to create a special purpose vehicle that funds infrastructure investment,
sucking in imports.
This proposal implies that a country with one of the highest fiscal deficits
in the world should increase that deficit still further. The hope is that
we can spend ourselves out of trouble provided we spend intelligently. Maybe
so, but it is a path full of pitfalls.
A poor country like India is typically capital-scarce. Funds from abroad can
raise investment above the level possible with only domestic savings. So,
a poor country typically has a large savingsinvestment gap, and a corresponding
current account deficit. Inflows of dollars from abroad plug the savings-investment
gap as well as current account deficit. This model was followed by Japan,
the Asian tigers and Asean.
The East Asian tigers in their heyday invested 40% of GDP, and so does China
today. By contrast, investment in India peaked at 26.9% in 1995-96 (see accompanying
chart), drifted down to 22.6% in 1998-99, and then rose marginally to 23.3%
in 2002-03. In 2001-02 and 2002-03, India’s savings exceeded investment,
something that usually happens only in rich countries.
When the RBI builds up forex reserves by buying US bonds, poor India is lending
rich USA money at very low interest rates. This is perverse. If India can
increase its investment rate to, say, 30% of GDP, that could soak up all domestic
savings as well as remittances from abroad, foreign direct investment, foreign
portfolio investment, and foreign aid. Manmohan Singh hopes that a spurt in
public investment in infrastructure will spur complementary investment in
the private sector. If this creates a large savings-investment gap, it will
create a correspondingly large current account deficit that soaks up excess
forex reserves.
Public investment has been falling for some time, largely because of fiscal
stress after the Pay Commission award. It has fallen from 7.7% of GDP in 1995-96
to 5.7% of GDP in 2002-03. So, a sharp increase today would simply take it
back to the levels of the mid-1990s.
However, this approach is not problem-free. It means expanding the fiscal
deficit by 2% of GDP. Will this extra public investment generate enough extra
growth to ultimately pay for the additional borrowing required? I am not sure
at all. After all, higher levels of public investment in past years did not
generate GDP growth any faster than today’s.
Public gross fixed capital formation peaked in the mid-1980s and subsequently
declined, without any adverse impact on GDP growth. So, the link between public
investment and GDP growth is not automatic. High-quality public investment
is unquestionably a spur, but India has a long history of poor-quality public
investment.
We cannot take for granted that the proposed special purpose vehicle will
invest only in quality projects. I suspect that the Sethu Samundaram project
(dredging a passage through the shallow Palk Straits) promised by the finance
minister will be a white elephant. Ditto for his five proposed desalination
plants for drinking water at Rs 1,000 crore apiece.
Many economists bemoan the investment stagnation of recent years. I am less
critical. I believe that the stagnation was in fact a sensible response of
industry to unfavourable conditions.
India had a big spurt in investment in the mid-1990s, and GDP growth averaged
a tiger-like 7.5% between 1994 and 1997. At the macro level, India seemed
to be faring splendidly. And yet at a micro level the spurt in investment
and output was bad news. The investment boom combined with the high fiscal
deficit drove up interest rates to 24%. Even a government-guaranteed project
like Dabhol borrowed at 21%. This was financial suicide for investors. What
was hailed at the time as an exciting spurt in investment soon turned into
a nightmare replete with massive bad debts.
So, businessmen rationally stopped investing, and interest rates fell. The
Asian financial crisis of 1997-99 and the global recession of 2001created
difficult business conditions, and exposed how inefficient and high-cost many
Indian industries were. The best Indian companies set about reinventing themselves
and improving productivity. Lesser companies sank without a trace. Investment
stagnation in this period was not a disaster, it was a wise decision by businessmen
to keep investment low until they were productive enough, and interest rates
were sensible enough, for them to take on global competition.
The lesson from the mid-1990s is clear. In a competitive world, we need to
improve our productivity and efficiency before embarking on an investment
spree. Public investment in quality infrastructure can indeed aid productivity
and efficiency, but history tells us that politicians have a habit of investing
in white elephants. We need to be careful about choosing new investment proposals,
and we must avoid the euphoric investment spree of the mid-1990s.
Good infrastructure is only one of our several needs. State bureaucracies
remain sources of red tape and corruption. China has people working 14 hours
a day six to seven days a week. Competing with this is not easy, and requires
greater flexibility in our own labour laws. Alas, there is no sign of progress
on this front.
Many industries continue, against all common sense, to be reserved for smallscale
industries. The banking system, which seemed to gradually coming of age, has
been forced back into the commandand-control mode by P Chidambaram’s
fiat on agricultural lending. This threatens to encourage a return to the
bad old practices which led to the lending boom and bust of the mid-19990s.
The rise in our forex reserves is a symptom of our inability to create a climate
in which large-scale investment can take place profitably. Creating that climate
requires far more than additional public investment.
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