There is growing chorus among Indian industrialists that the Narendra Modi government is not doing enough work on the ground, resulting in a bigger-than-expected delay in reviving the investment cycle. They note that foreigners are still hesitant to cross the border and invest in India, as data shows, despite the promises made by India’s pro-business Prime Minister Narendra Modi on ease of doing business and India’s prospects as the sole bright spot among emerging markets.
Modi’s promises alone wouldn’t work to bring in investments and, for investments to happen, companies should find a conducive environment to invest in India when they finally arrive buying those promises, cautioned industrialist Ratan Tata in Bangalore on 4 February in a media-interaction. “So the real test comes when they (foreign industries/ investors) are making their due diligence to decide whether India is the place to invest, not just on the basis of Mr Modi's promise,” Tata said.
The investment data compiled by agencies such as the Centre for Monitoring Indian Economy (CMIE) has not been very promising so far. According to a recent CMIE report, announcement of proposals to create new capacities declined sharply (74 percent) in the third quarter of fiscal year 2016. Only 383 projects were announced in the quarter with an estimated investment of Rs 1 lakh crore, which is the lowest in at least five quarters, CMIE said. But, to be, sure, it is too early to conclude a trend yet.
“It is difficult to figure out what the exact reasons for the slowdown are because what we essentially do is to look at what the numbers aggregate. The decline seems to be quite secular across all sectors. So, one sees a decline in manufacturing, a very sharp fall in mining, construction, so it is quite secular. So, it looks like there are some macro reasons, there are some larger reasons that seem to be holding back investments,” Mahesh Vyas, Managing Director & CEO of CMIE told CNBC-TV18 in a recent interview.
Why investments are falling or, to put the question in another way, why Modi’s campaigns executed very well during his many foreign trips (Remember Madison, Wembely and Guildhall), which were no less effective than fund raising-campaigns by professional investment bankers, aren’t working yet?
Let’s be fair.
The world economy is not doing well. There are shadows of prolonged economic slowdown in major world economies in Europe and in the US. In the East, no-one knows for sure how deep is the problems in China. India’s peers among emerging markets such as Indonesia have their own share of problems on account of political instability, corruption and infrastructure worries.
The sharp crash in oil prices has begun severely impacting the oil-producing countries and, in turn, the export markets of related countries including India. In short, investors across the world are in a cautious mode. The right strategy, in times of uncertainty, is to preserve capital not to spend.
But, beyond this reason, India has its own domestic woes on the execution-front. The revival of investment cycle, promised by Narendra Modi when he took over 20-months back by way of growth-oriented reform-measures, hasn’t begun yet in a convincing manner. The manufacturing sector is still struggling and, more worryingly, stalled projects, after declining for a while, have started rising yet again in the recent quarters.
It certainly appears that the economy is not on a safe ground yet. The increase in stalled projects has been cited a major worry by the Reserve Bank of India (RBI) during its sixth bi-monthly monitory policy. “If you look at the CMIE data on stalled projects, it looked like it was coming down steadily and what seems to have happened over the last few quarters is that it seems to be climbing up again," governor, Raghuram Rajan, said during the post-policy press conference. Going by the CMIE data, India has stalled projects to the tune of Rs 10.8 lakh crore.
Industries too have assessed that the improvement in business environment, as expected earlier, hasn’t happened yet despite the government promises. Take a look at the IT services. The National Association of Software and Services Companies (Nasscom) now expects Indian IT exports to grow 10-12 percent in constant currency terms in fiscal year 2017, lagging behind the 12-14 percent growth forecast it had made for the current year.
“We had estimated that the domestic segment will grow at a certain pace on the back of the announcements made by the government and trends that we saw. However, many of those have not taken off. As and when they do, we will see a larger impact," said Nasscom president R Chandrashekhar.
It’s not correct to paint a doomsday scenario for India given its increasing integration with rest of the world economy. It is inevitable that India too will feel the heat on export-front and on inward remittances. But, if one reads between the statements of Tata, Modi urgently needs to deploy his machinery to prepare ground to absorb large-scale investments (by facilitating infrastructure, power, labor laws and easier processes to start business) before he offers the red-carpet to global investors. Else, the whole efforts can backfire.
Read Tata’s caution again: So the real test comes when they are making their due diligence to decide whether India is the place to invest, not just on the basis of Mr Modi's promise.