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POLICY Growth: It's A Puzzle, Really Meet three morose men: Finance Minister Yashwant Sinha has done his bit of fiscal management; RBI Governor Bimal Jalan has slashed interest rates twice already this year; and Commerce Minister Murasoli Maran has sought to usher in what he calls ''a fuller liberalised import regime''. But why isn't the economy growing? By Ashish Gupta
Three morose men. three important questions. Don't effective fiscal, monetary, and trade and investment policies spur investments any more? Are cuts in interest rates irrelevant as far as investments by the private sector are concerned? And if businessmen agree that these factors are meaningful, then why isn't investment happening in India Inc.? Of that-investments not happening-there can be no doubt: according to the Centre for Monitoring of Indian Economy (CMIE), between October 2000 and November 2001, 60 projects valued at Rs 80,400 crore were put into cold storage by both the public and the private sector. Of this amount, Rs 41,000 crore is accounted for by projects in power distribution and Rs 12,900 crore by those in services. Companies are neither willing to invest in greenfield ventures; nor are they keen on expanding capacities. There's reason for this restraint. The cost at which funds are available is still an important factor in a company's decision to invest or not invest in a particular project, but it is not the most critical one. ''Lower interest rates will make investments viable, but they can't, by themselves, generate more investment,'' explains Jamshed J. Irani, the former managing director of Tata Steel. ''The investment still has to be justified by a business model.'' Then, there's the R-factor. As Pradeep Dokania, an executive vice president at DSP Merrill Lynch puts it: ''There are others things that affect investment decisions, like the progress of reforms in the sectors in question.'' Most economists point to the US example to make a case about interest rates not necessarily spurring investments. Although the Federal Reserve (the US central bank) has pruned interest rates 11 times this year-bringing it down from 6.5 per cent to 2 per cent-companies have been loath to make fresh investments. For those interested in numbers, the gross private domestic investment in the US in 2001 declined by 12.3 per cent in the first quarter, 12.1 per cent in the second, and 10.7 per cent in the third. And what little respite these cuts have managed to win for an economy that is now truly in recession can be attributed to an increase, however marginal, in consumer-debt. The Indian consumer, though, is far more risk-averse and doesn't always react to a cut in interest rates by going out and borrowing more.
Are our interest rates really low? Not quite, says Venugopal Dhoot, the Chairman of consumer durables manufacturer Videocon. ''Although the lowering of interest rates is a good sign, even now, the prime lending rate in India is high at 11 per cent.'' With inflation staying at the sub-3 per cent levels, that works out to a real interest rate of 8 per cent, almost three times that in the first world. It isn't that industry doesn't appreciate the extent by which interest rates have plummeted. ''Even a few years ago, it was inconceivable to think that interest rates would come down so sharply,'' says Rahul Bajaj, Chairman & Managing Director, Bajaj Auto. Only, technical difficulties like the high contractual savings rate and the operating cost structure of banks will ensure that interest rates in India never fall as low as everyone would like them to. Even if they were to, however, you wouldn't find corporates queuing up before banks. The manufacturing sector in India suffers from endemic over-capacity. Much of this capacity was created in the boom-years of the early nineties in anticipation of a spurt in demand that never really materialised. The story of the Indian steel industry is a case in point. Between 1993 and 1997, the sector witnessed the creation of six million tonnes per annum of fresh capacity; in the same period demand grew by less than 1 per cent. The steel sector isn't alone in this aspect. A study by the Indian arm of a global consulting firm shows that most sectors suffer the same malaise: cars to the tune of 35 per cent, commercial vehicles, 30 per cent, and bicycles, 20 per cent. Consequently, companies are willing to invest only in infrastructure sectors like power, telecom, and roads. The catch? ''The government has to play a dominant role here, both by furthering the reforms process and by providing incentives for the private sector to invest,'' says Rajeev Verma, a vice president with DSP Merrill Lynch. Adds Irani: ''Consumption has to catch up with installed capacity before further investments in capacity can be made.'' It's the environment, stupid India Inc.'s reluctance to invest also stems from its concerns over the future, especially in sectors where demand shows no signs of making its way up north. As Videocon's Dhoot points out: ''Most industrialists are constrained by the fact that the shape of the business and investment climate a couple of years down the line is unclear.'' Ashok Leyland's Managing Director R. Seshasayee agrees with Dhoot. ''Investments take place only when you can make a secure call on the future, but if the present and the future are both uncertain, why should anyone make investments?'' Much of this uncertainty has to do with government policy. Like curiosity over import tariffs across categories two years from now, or whether the government will finally go in for complete capital account convertibility. And fears originating from these issues are only exacerbated by the increasing vulnerability of developing countries like India to imports from developed economies and also from China. ''All this creates a fear psychosis,'' sums up Dhoot. Worse, exports, once considered the great escape-route, are shrinking; business and consumer confidence are low; and commodity prices are in for a prolonged phase of deflation. ''The uncertainties over the financial health of the system-IFCI and IDBI-and the rapid erosion in the wealth of companies and individuals have had a dampening effect on consumption and investment behaviour,'' says S.S. Bhandare, a consultant to the Tata Group. The factors Bhandare speaks of have also hurt the stockmarket, making it difficult for companies to raise money through IPOs. And the inability to raise equity-a key component of any large investment-prevents companies from raising debt (they typically leverage the equity to raise more funds for their projects). For companies in the consumer products business, things haven't been made any better by the erosion in the spending capacity of the rural populace. In 1996-97, the agriculture sector grew by 9 per cent. Over the past three years, it has grown by far less. A back-of-the-envelope calculation (every percentage point growth in the agricultural sector translates into an increase of Rs 10,000 crore in rural incomes) shows that this fall has resulted in the loss of over Rs 50,000 crore in terms of rural income over just two years. Catalysing fresh investments The private sector has no one but itself to blame as far as the issue of overcapacity is concerned. Through the eighties, global demand for commodities (and their prices) increased. The Indian private sector, constrained by a licence-regime that stipulated capacities stewed in impatience at what it perceived an opportunity lost. Predictably, the sector went into overdrive in the 1990s. But it overlooked a significant change. The eighties saw the prices of commodities like copper and steel zoom; by the beginning of the 1990s, they had started on a southward journey. The collapse of the Soviet Union flooded world markets with commodities. ''The nature of business changed between the eighties and the nineties,'' says Saumitra Chaudhury, the chief economic advisor at rating agency ICRA. ''And most Indian businessmen failed to comprehend this change.'' Companies that invested in creating capacity in the 1990s, then, are unlikely to make fresh investment now, irrespective of interest rates. But there's nothing to hold them back from investing in the infrastructure sector where demand outstrips supply. The problem with the infrastructure sector, explains Vinayak Chatterjee, Chairman, Feedback Ventures, is that ''there are not enough bankable projects''. That's a valid grouse: up for the taking are eight major road projects, two small solid waste-management ones, and none in the areas of airport construction and power. It is only by taking crucial political decisions in these areas that the government can hope to create a better investment climate. These range from levying user charges on water and electricity to corporatising public utilities like the loss-making state electricity boards. But when it comes to decisions like these, the government suddenly finds itself lacking political will. And so, it will continue to prune interest rates, speak some more about a better fiscal and trade environment, and then worry where the investments have all gone. |
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