Remove the fear psychosis among entrepreneurs
The development benefits of policy interventions aimed at reviving investor sentiment need to be clearly spelled out
India’s robust growth performance of last three years suddenly hit a speed breaker in the first quarter of the fiscal year. Among the multiple headwinds facing the Indian economy, one of the biggest challenges is the declining rate of investments. Gross fixed capital formation in FY17 has been at a thirteen year low (27.1% of GDP) against an average of 33% between FY06 and FY13. The main contributing factor has been weak private sector investments. Domestic private investments form the bulk of private investments, and unless these accelerate, the investment cycle will not see a turnaround.
Growth in private investments has remained weak owing to concerns related to demand, credit and regulatory challenges. Capacity utilisation rates in most industries continue to be around 70%-72%. Unless these reach optimal levels of 78-80%, fresh investments will not materialise. While overall consumption in the country has been picking up, it is ironical that domestic sales in several sectors have not benefited as much. The reason is a rapid surge in imports that has affected market shares of domestic enterprises.
The skewed balance towards imports needs to be corrected to encourage fresh invest- ments by domestic companies. This requires a complete review of existing FTAs to ensure effective market access for Indian companies. The incidences of inverted duty structure should be corrected.
On the credit front, Indian industry is saddled with higher cost of finance. As per FICCI’s latest Business Confidence survey, average lending rate by banks as reported by firms currently stands at 12%. Higher interest cost is not only a dampener for large corporate houses but also for SMEs. A cut of at least 100 basis points in policy and lending rates is desired to propel demand for interest-sensitive sectors like consumer durables, auto and housing. Now that the government has announced a recapitalisation plan to the tune of ₹2.11 lakh crore for public sector banks, one hopes that the credit cycle will strengthen alongside lowering of lending rates.
To promote the culture of entrepreneurship, there is a need to remove fear psychosis among entrepreneurs by strengthening the trust between the industry and banking sector as also with bureaucracy. Further, in several sectors such as telecom, pharma, power, automotive and agribusiness, there have been farreaching regulatory changes that have impacted or could impact the performance of these sectors. Today, reviving investor confidence should be a priority. The development benefits of policy interventions aimed at reviving investor sentiment need to be clearly spelled out, especially in terms of employment generation outcomes.