Time to step up investor confidence

The advance estimates released by the Central Statistical Organisation (CSO) have pegged the country's GDP growth for 2011-12 at a three-year low of 6.9 per cent. This means that the government expects the growth rate to slow down further to 6.5 per cent in the second half (October-March) of the current fiscal from 7.3 per cent in the first half (April-September).

While the latest estimates of GDP numbers are not surprising, they are certainly a cause for concern. While the expected growth of the farm sector at 2.5 per cent is partly due to the base effect (it had grown at 7 per cent last fiscal), the projected growth of manufacturing at 3.9 per cent and contraction of mining by 2.2 per cent should largely be attributed to want of policy support at a time when the investment climate is far from favourable.

In the case of mining, for instance, the sector has suffered because of government inaction, huge delays in clearances and an absence of policy direction in the wake of a series of corruption scandals. In the case of manufacturing, the sector has suffered on account of the government's apathy to attend to its needs at a time when export demand has suffered a setback, and interest rates have moved northward.

INVESTMENT SLOWDOWN

The major problem facing the economy is the loss of investor confidence — foreign and domestic. As the RBI's Third Quarter Review of Macroeconomic and Monetary Developments released on January 23 pointed out, the growth of the economy has been dragged down by lower external and investment demand during the three quarters ending December 31, 2011. There has been a sharp decline in new corporate fixed investment since H2 of 2010-11 and this pattern continues.

The recovery of GDP growth to 8.4 per cent in 2009-10, as well as 2010-11, after the 2008-09 big plunge to 6.7 per cent, the year of the previous global economic and financial crisis, was largely led by consumption growth — both private and government. However, sustaining the growth momentum for a longer period isn't possible without a pick-up in much-needed investment.

The Gross Fixed Capital Formation (GFCF), which had increased from 28.7 per cent of GDP at current prices in 2004-05, to almost 33 per cent in 2007-08, witnessed a fall thereafter. For 2011-12, it is estimated at 29.3 per cent, falling below the 30 per cent level for the first time since 2004-05.

It is evident, therefore, that the present growth slowdown has been accentuated by drying up of investments that hold the key to future growth. Because of the prevailing uncertain business environment, the corporate sector has been postponing its investment decisions, even as it is sitting on piles of cash reserves. A recent analysis by Business Line , for instance, showed that the combined cash balances of 2000 listed companies had gone up by nearly a fifth in the 12 months ended September 2011, to touch Rs 3,50,000 crore. Moreover, a large number of PSUs are also flush with funds that await investment opportunities.

GOVERNANCE DEFICIT

Most experts have expressed a view that the investment slowdown since the second half of 2010-11 is more to do with domestic factors than the global economic slowdown. Investor confidence is at an all-time low because of the governance deficit and the virtual absence of decision-making. There is pervading disillusionment and scepticism among investors — both foreign and Indian.

According to Time magazine, the Supreme Court's decision to cancel 122 controversial mobile phone licences has opened up a new round of scepticism regarding India as a destination for foreign investment.

AGENDA FOR BUDGET

The Government should use the forthcoming Budget for 2012-13 to prop up investor confidence and revive the sagging investment climate. To do this, it must accord top priority to fiscal consolidation by ruthlessly trimming wasteful subsidies to create space for investments and spur growth. The Finance Minister, Mr Pranab Mukherjee, had admitted in the winter session of Parliament that the subsidy Bill for 2011-12 has overshot estimates by almost Rs 1 lakh crore.

What is more worrying is the composition of the fiscal deficit; it is being financed by huge borrowings that are expected to amount to Rs 5,10,000 crore this fiscal, against the budgeted Rs 4,17,128 crore. The government borrows to subsidise consumption which provides fuel for pressures from inflation and depresses investment. The RBI can reduce interest rates to prop up investments only if inflation remains under control.

Recently, Mr Pranab Mukherjee stated that he's losing sleep regarding subsidies. He should treat his insomnia by reducing the subsidy burden, laying down a new road map for fiscal consolidation, and reforming and simplifying the tax system to raise more revenue. Simultaneously, there is a need to step up investments in agriculture, including water harvesting, irrigation and supply chains.

Efforts should be taken to encourage labour-intensive manufacturing, boosting health, education and skill upgradation for the new entrants into the labour force. In short, the budget should help step up the ‘feel-good' factor. The rest will automatically follow.