Broken promises: Reason why real growth continues to elude under NDA

With a gross domestic product (GDP) growth rate of 7.5 percent logged in January-March, India has beaten China and is the fastest growing major economy in the world. What has done the trick is a change in methodology in GDP calculation introduced by the NDA government, even when rest of the macro-indicators did not support such a growth figure. That’s one reason why many economists and even the Reserve Bank of India (RBI) are largely skeptical about the GDP figures. Economists aren’t ready yet to admit economy has indeed turned the corner. For instance, global rating agency Fitch today lowered its real GDP growth forecasts for India to 7.8 percent form 8 percent in FY16 and to 8.1 percent from 8.3% for FY17. Economists say since a host of high-frequency macro numbers points to persisting slowdown in the economy. These include poor bank credit growth, stress on corporate balance sheets, stressed asset pile of commercial banks, absence of any strong demand revival and huge backlog of stalled projects. But the most critical indicator they highlight that is blocking the road to a quick recovery is absence of large investments. The question is beyond the euphoria over big-ticket investment announcements made by politicians has the country actually received any significant investments? [caption id=“attachment_2323338” align=“alignleft” width=“380”]  Reuters[/caption] The problem A study conducted by rating agency Care tells us the difference between what was promised and what was actually fulfilled in the last five years (2011 to May 2015). The fact is, just about 8 per cent of the investments promised across industries have been actually made. Majority of the promises have remained on the paper. According to the study, the actual investments made across all industries in the last five years stand at Rs 2.71 lakh crore, while Rs 31.93 lakh crore investments were proposed across 11,784 projects in the country. Why this happened? Besides the sluggish economy, delayed project clearances and an increasing number of stalled projects, prompted investors back out later from the investment promises made, Care says. What is more worrying is that there has been a continuous slowdown in the proposed amount and number of investments over the last five years with the former declining from Rs 15.4 lakh crore in 2011 to Rs 4.05 lakh crore in 2014 and further to Rs 1.5 lakh crore for the five months of 2015. Similarly, the number of investment proposals declined to 1,843 in 2014 as against 4,336 in 2011. During the first five months of 2015, number of proposals stood at 826, compared with 868 in the corresponding period of 2014. The short-message is very few investment commitments have materialised so that the growth juggernaut gets a push. With no private investments happening, logically the onus to kick-start investment cycle would have fallen on the government. But, the mistake both the UPA did and NDA seems to follow — limiting public spending to fulfil the obsession on fiscal deficit numbers — has largely constrained this channel too. Absence of fresh investments has been highlighted by most economists, including RBI governor Raghuram Rajan and the government’s economic advisor, Arvind Subramanian as a key impediment for growth recovery. The fact is current state of problems are much deeper than it was one year back for the reason being most companies, especially in infrastructure, have broken balance sheets and these are aren’t easily repairable. UPA’s mistakes The slowdown in investments has happened over a period of time. The so-called policy paralysis gripped the economy during the UPA regime has done considerable damage to the prospects of the economy. The problem began with the inability of the corruption-hit UPA government to take faster policy decisions and push the reform process. Delay in making key decisions damaged investor confidence. Slow land acquisition and environmental clearances paralysed industries. They had to face huge cost over-runs, which severely hurt their ability to pay back bank loans. The result was a sharp spike in the stress level (both in terms of bad loans and restructured loans) on the balance sheets of banks, which in turn forced banks to shut funding channels to these companies. A sluggish world markets, coupled with high inflation and interest in domestic economy that hurt demand, complicated the problem. In fact, in the last 2-3 years, there has been hardly any big-ticket lending to industries by Indian banks, except a few cases. What is more worrying is, the Narendra Modi government, which assumed power last year with the promise of a faster change, is too struggling to get the solution right. Global rating agencies have flagged caution. Early this week, Moody’s, citing a poll it conducted, said there is “some disappointment…with regard to the pace of reform under the administration of Prime Minister Narendra Modi, and increasing concerns about the risk of policy stagnation. “Specifically, almost half of the poll respondents identified sluggish reform momentum as the greatest risk to India’s macroeconomic story.” The agency said almost half of the respondents believed “that sluggish reform momentum represents the greatest risk to India’s macroeconomic story going forward”. Lowering the growth projections, Fitch too has noted that there are signs that acceleration (in reforms) may be slower than previously expected. “The extent and pace at which reforms translate into higher rates of growth continues to be dependent on implementation,” it said. This clearly means time is running out for the government to speed up work on pushing critical reforms — land acquisition and GST — and get the economic momentum on by increased public spending. Simultaneously, the government needs to repair the banking sector, neck deep in bad debts. Stressed assets are currently about 13 per cent of the total loans given by state-run banks. The message is this. Beyond the good statistics, if the real growth has to happen, the government needs to identify the faulty areas and quickly work towards getting key reforms done and facilitate actual investments in the economy. There aren’t any short-cuts.