Data is pouring in from diverse sources and one thing is clear: investments are not taking off any time soon. New investment proposals that stood at Rs 22,00,000 crore in 2008-09 declined to Rs 10,64,000 crore in 2014-15 and further to Rs 8,00,000 crore in 2015-16. Why is this so despite the government’s efforts to motivate entrepreneurs to invest? Let me state the main reasons that I have gathered from my talks with businesspersons, bankers and bureaucrats.
1. Stalled projects: Every major business group has at least one project that is stalled. The promoter is struggling to pull it out of the woods. While a number of projects have been put back on the rails in the last four years, many more have derailed in the same period. CMIE has put out the following figures of stalled projects at the end of March of the year:
I wonder what happened to the Project Monitoring Group that was set up under the Cabinet Committee on Investment. As long as Mr Anil Swarup (now Secretary, Ministry of Coal) was heading the group, there was visible progress. After he left, the PMG appears to have lost its vigour. Unless stalled projects are back on track, investors will be loath to commit new investments.
2. Government’s inertia: The data put out by CMIE and HSBC show that ‘non-policy’ reasons account for 55 per cent of the stalled projects. Land acquisition, environmental clearance, non-environmental approvals and fuel/feedstock supply are listed as ‘policy’ reasons. The ‘non-policy’ reasons are unfavourable market conditions, lack of promoter interest, lack of funds and other reasons. I was intrigued to note that lack of promoter interest (16 per cent) and lack of funds (4 per cent) account for 20 per cent of stalled GOVERNMENT projects. Even if the government will focus on government projects alone and resolved the issues affecting them, a lot of investments will turn productive.
3. The NPA scare: Non-performing assets are not a new phenomenon. In recent times, the problem of NPAs was acute in 2002 and 2008. Banks lent the money, so banks must be told to recover the money. There was no need to create a scare of prosecution and in every case of NPA.
NPAs can be divided into two categories — wilful defaulters and victims of an economic downturn. There has been a downturn in the global economy and the Indian economy. A downturn will claim victims. Most small and medium enterprises that have NPAs are victims and not villains. They need the government and the banks to hold their hand until economic growth picks up in the affected sectors. Bankers will do that if they are left alone and not chastised by all and sundry and, in due course, those loans will be recovered. Wilful defaulters are a separate class. The bankers must be told firmly to use all measures including enforcing personal guarantees, and they will do their job. The RBI Governor alone seems to have realised the consequences of whipping up mass frenzy over NPAs when he said that a heavy-handed approach “will kill both entrepreneurship and lending”.
Role of Interest rate
4. Interest rate and credit growth: Whatever one may say, the investor has benchmarked the rate of interest to his rate of return. If his interest cost is high, he feels that his reward will be low, and so he says why risk another investment? That is why it is believed that a lower interest rate will stimulate investment. The RBI has its own constraints in cutting the policy rate; the banks have their own problems in lowering lending rates (deposit growth vs credit growth and deposit rates vs lending rates). There is no easy solution. Nevertheless, the government is obliged to find solutions, even if they are only sectoral solutions, and tweak some other instruments (taxes, rebates, subsidies) to compensate the affected sectors. Doing nothing is not an option. What is the story of credit flow to industry? Between February 2015 and February 2016, credit growth was 5.36 per cent, which is less than one-half of the average rate of credit growth in the last five years (13.66 per cent). This translates to additional credit of about Rs 1,40,000 crore. Infrastructure (59 per cent) and steel (24 per cent) have cornered 83 per cent of the additional credit. All other sectors got only 17 per cent. Large industries got additional credit of Rs 1,48,000 crore while small and medium industries suffered a contraction of Rs 8,000 crore. The numbers are at odds with the claims of the government about credit support to small and medium industries. These are the problems that cry for attention and redressal.
No witch hunt
5. Suspicion and witch hunt: Large loans are sanctioned by a committee of the Board of Directors of a bank. Every large loan that has turned NPA is now viewed with suspicion and, according to bankers, there is a witch hunt. No banker is willing to approve a large loan; no banker is willing to sell the bank’s NPAs to an asset management company at a discount. Every banker wants to retire without incident — such is the atmosphere of suspicion that has been created by thoughtless pronouncements. The government’s intentions may be good, but that is not enough. As the saying goes, the way to hell is paved with good intentions. The government must boldly tackle the problems and take the difficult decisions. That alone will promote new investments.