It was akin to setting the cat among the pigeons. In an interaction with industry captains last week, Finance Minister Nirmala Sitharaman asked why India Inc. was hesitant to invest for expansion and/or in new projects. Borrowing an analogy from the Indian epic Ramayana she asked “Is it like Hanuman? You don't believe in your own capacity, in your own strength and there got to be someone standing next to you and say you are Hanuman do it" and added "Who is that person going to tell Hanuman? It can't certainly be the government." Ostensibly the finance minister wanted to know from industry captains what they wanted to hear on what needs to be done to invest. The question and the metaphor left many among industry captains squirming.
The Question And The Context
It is said that it is the question and not so much the answer which illuminates. Questions also illustrate and eloquently amplify the context.
Prima facie India is perceived to be better placed than all major economies. Multilateral agencies IMF and World Bank have forecast India with a GDP growth of 7.4% will be the fastest growing large economy this year. The projected growth though is not a given. The forecast for GDP growth is not decreed. It requires the private sector to pitch in with investments to boost demand, job creation, incomes and growth.
The government has come to believe that private sector investment has lagged behind potential and India Inc has been hesitant. This is despite rising capacity utilisation –the Reserve Bank of India’s survey of August reveals capacity utilisation rose to 75.3% in the fourth quarter of FY22, and that manufacturing received more orders than in the previous quarter.
India Inc. does not lack in resources to invest thanks to deleveraging by Indian companies – this is visible in the levels NPA and stress levels in Indian banks -- and burgeoning profits. In past two years alone India Inc has built a war chest of investible resources riding on the return of economic engagement post the waves of the pandemic – data released by the RBI reveals that year on year sales growth of private and listed non-financial corporates rose to 41.0% in the first quarter of 2022-23 from 22.3% in the previous quarter.
It is estimated that large Indian companies are sitting on trillions of rupees in cash reserves. In a recent analysis, titled ‘What Happened To The Superlative Profits?’, Mahesh Vyas, at the Centre for Monitoring Indian Economy, estimates that ‘Indian companies made superlative profits during 2020-21 and 2021-22. In 2019-20 Indian companies netted Rs 5.6 trillion – over 25% higher than the previous high. In 2021-22, as per data presented by a smaller universe of 3300 companies, Indian companies made a net profit of Rs 6.7 trillion.
The cache of profits though has not been invested in new or expansion projects. And this is visible in the crawling growth in data on gross fixed capital formation in the GDP figures released last month. It is also evident in the lack of announcements on new projects and in data on assets created by private companies over the past two years. Indeed Indian companies, post dividend, have preferred to park their surplus cash in the equity and debt markets. Data put out by the Association of Mutual Funds of India is instructive. In August 2022 India’s mutual funds managed assets worth Rs 39.53 trillion. Of this institutional investors account for Rs 17.17 trillion or 43.3% of the total assets with funds.
Potential Haunted By Realities
Just as growth is not ordained, investment decisions are not conceived in a vacuum. As uncertainty haunts the global economy Donald Rumsfeld’s famous quip about knowns and unknowns has a new addition "unknowable".
The IMF in July 2022 trimmed the growth forecasts of every major economy in the world – including the US, China, the UK, Germany, France, Canada, Japan, Italy, Spain and India. It is evident from the forecasts presented by the IMF in July 2022 in July 2022 that roughly half the global GDP is poised at the brink of contraction or recession In June 2022 the Reserve Bank of India trimmed its growth forecast for the year to 7.2% only to see the first quarter GDP figures released in August coming in lower triggering a spate of downgrades in growth forecasts for FY23.
Global growth is crippled by rising cost of capital and falling growth. Rising inflation has triggered a panic among central banks resulting in a synchronised rise in interest rates. In July 2022 ratings agency Fitch observed that this is the fastest pace of rate hikes in three decades. It is now estimated that the US Federal Reserve would hike its rate by 75 basis points at its next meeting and is intent on taking the terminal rates to over 4% and will marinate the economy at a higher interest rate for a longer duration.
India’s economy is in a far more evolved and complex space than in previous decades. Falling global growth shows up on trade and investment flows and therefore on the currency. This has consequences for emerging economies, for the fiscal and current account arithmetic – particularly for a net importer of energy like India. Exports which are already sliding account for nearly a fifth of India's GDP – and it is estimated that over a third of the BSE 500 are companies vulnerable to swings in global trade. These factors have a bearing on corporate investment decisions. The RBI, which has deployed over $45 billion of reserves, is obliged to protect the currency and will necessarily respond to the hikes by the U.S. Federal Reserve, the ECB and the Bank of England – already the SBI’s prime lending rate is at 13.45%. Rising interest rates crimp demand, consumption, investments and growth.
States And The State Of Governance
Getting out of the spectre of angst and anxiety however demands more investments not less. The approach cannot be one of episodic interventions in economic cycles but should rather be focussed on enabling long term productivity and efficiency of resources.
Serendipitously India is well placed to harness the opportunities at the intersection of disruptive change unravelling across the world – from reshoring of supply chains for resilience to digitalisation of manufacturing and services to migration of energy and food production to meet the challenges posed by climate change.
Converting the challenges into opportunity though requires structural reforms. Catalysing the animal spirits which spur investments requires harmony, a tango between policy and opportunity. This demands the liberation of factors of productivity– land and labour particularly – which are located in the states. Tragically the politicos in the states have all the time for headline grabbing events which cause disharmony and affect investment sentiments but little time for transformational change.
India’s entrepreneurs are forced to wade through regulatory cholesterol. Studies by Avantis Regtech show that India’s entrepreneurs must deal with over 1,536 laws, 69,233 compliances and 6,618 filings – and the bulk of the regulatory cholesterol is located in state laws. Yes there is a new labour code but its adoption by states is moving at a snail’s pace. The efforts to improve ease of doing business are largely confined to metros, often viewed seen as academic pursuits and are being gamed by states.
Earlier this month the Vedanta-Foxconn venture announced its new semi-conductor venture would be located in Gujarat. The need for basic analysis, on why Gujarat won and other states lost calls for a data driven debate on why Gujarat is able to attract mega projects whether in automobiles, semiconductors or the new hydrogen initiatives. The imperative was waylaid by a fruitless blame game.
Once in two or three years state governments hold investment summits. There is much effort in branding - Advantage Assam, Credible Chhattisgarh, Magnetic Maharashtra, Happening Haryana, Progressive Punjab, Resurgent Rajasthan, Momentum Jharkhand, Uttar Pradesh Global Investor Summit et al. Every summit ends with promises and MoUs worth lakhs of crores. The moot question is how many translate into projects?
Ideally those elected to represent the people of these states must audit the outcomes of these promises– if not in the annual budget sessions at least later in the year. That is precluded by truncated assembly sessions. A recent study by PRS Legislative shows that between 2016 and 2021, the legislative assemblies of states met for an average of 25 days in a year.
The deficiencies in human development and deficits in infrastructure are stark and define India's K shaped economy. This is scarcely conducive for harnessing the demographic dividend, to propel growth and prosperity. Every square kilometre of India is governed by state governments. Every major second generation reform is in the ambit of state governments.
Unfortunately in India's governance architecture state governments have got a free pass on accountability from successive regimes on allocations and outcomes. Perhaps it is time the question posed by the finance minister is reframed to ask state governments what would it take for states to make investments happen!
Shankkar Aiyar, political-economy analyst, is the author of ‘Accidental India - A History of the Nation’s Passage through Crisis and Change, ‘Aadhaar: A Biometric History of India’s 12-Digit Revolution’ and The Gated Republic: India’s Public Policy Failures and Private Solutions.
The views expressed here are those of the author’s and do not necessarily represent the views of BQ Prime or its editorial team.
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