What ails investment

Government must step up in reforms as slow growth rate of GDP has impacted India’s investment

Vinay K Srivastava | January 19, 2016


#investment   #GDP   #GST   #Companies Act   #Niti Aayog   #Income Tax Act  


The growth rate of GDP in the country was 7% during the second quarter of 2015, lower than the 7.5% growth recorded in the preceding quarter. It was also lower than government estimation of 7.4% in the current financial year but higher than the 6.7% growth logged in the corresponding quarter of 2014. Even the government had started spending in the beginning of this fiscal year but the GDP numbers do not reflect this as yet. It is directly affecting India's investment, which has been much lower than its potential over the last few years. This is evident from the continuing slowdown in the core sector of the economy.

The growth in eight major core sectors, which together constitute 38% of the country’s factory output, in July, fell to 1.1% as compared to 3% in the previous month. Investors are not inclined to invest while government spending too has not picked up as expected before.

The performance of the policy of disinvestment that started in the year 1991 has not brought the desirable results till now. Hence the foreseen results could not be achieved and the purpose of the policy seems to be defeated. 

The total receipts of disinvestment proceeds in the year 2014-2015 was Rs 36,925 crore against the target of Rs 51,925 crore. It is about 70%, far behind the target, as investors are reluctant to invest in public enterprises because of unfavourable environment of the market; offers made by the government were not attractive and also received strong opposition from employee and trade unions.
The government will be able to meet the target, especially since the market seems to be indicating an appetite.

The absence of fresh investments is the immediate and foremost problem which the economy is facing. The gross fixed capital formation (GFCF) which is a proxy for investment, and private final consumption expenditure reflect demand in the economy, witnessed a slow growth, as interest rates remained high.

The GFCF rate continued to decline from 33.6% of GDP in 2011-12 to 28.7% in 2014-15 and in the current prices, the figure went down from 29.2% in Q1 to 28.7% in Q4.

It peaked at 32.9% in the year ending March 2008 but declined steadily to 30.4% in the year ending March 2011. This dimension of decline in investment as a share of output of 5 percentage points had not taken place in the economic history of independent India. The rate of growth of GFCF now languishes around zero. Stalling of projects, a term synonymous with large economic undertakings in infrastructure, manufacturing, mining, power, etc., is widely accepted to be a leading reason behind this decline. This is disappointing to the policy makers.

The recessionary tendencies of 1991 and 2008 witnessed a sharp decline in GFCF. This is because if output falls, firms expect to make lower profits; therefore they start to think of reducing output rather than increasing it. The recessionary climate tends to create decline in the income, output and employment in the economy.  This situation needs to be handled carefully as stalled projects in India are not new, but an old problem existing for a long time.

Under the present scenario, investors are not coming forward for fresh investment as the present business environment is neither favourable nor conducive for corporate investment. Investment ratio has fallen due to various factors in the country including high interest rates, inflation, bureaucracy, lack of regulatory framework and policy certainty, complicated tax structure, difficulty in shutting down failing businesses, weak intellectual property, unfavourable regulatory framework, complex and cumbersome labour laws, bankruptcy laws and assets restructuring, delay in environmental clearances, unfavourable market conditions, corruption, red-tapism, wave of optimism, lack of fuel supplies, stalled electricity projects, lack of available infrastructure, etc.

Red-tapism has been a catch of all phrases in the country, specifically related to the ongoing environmental clearances and land acquisitions. The government is supposed to be sorting it out but there has not been much improvement.

The provision laid down in section 56 of the Income-tax Act, 1961, immensely affects the fair market valuation norms on angel investments as the current rule introduced in The Finance Act of 2012 says that capital raised by an unlisted company from any individual against an issue of shares in excess of fair market value would be taxable as income from other sources and start-ups are liable to pay 33% tax on any investment they receive. The Companies Act, 2013 replaced the earlier legislation of 1956, with several amendments but it should be further changed, to distinguish between closely held private companies, public companies, and publicly listed companies.

Increasing inflation in India has become a serious problem despite periods of economic slowdown. The present inflation rate is between 8-10%. Supply constraints in agriculture have caused rising food prices related to cost push factors which further causes lowering living standards of the masses. This situation is adversely affecting the investment criteria for the corporate. In this direction, the introduction of Goods and Services Tax (GST) would be a significant step in the reform of indirect taxation in the country. Amalgamating several central and state taxes into a single tax would mitigate cascading or double taxation, facilitating a common national market. The simplicity of the tax should lead to easier administration and enforcement. From the consumer point of view, the biggest advantage would be in terms of a reduction in the overall tax burden on goods, which will be benefitting for the consumer as well as for investors to boost up and create a healthy environment for investment.

In this backdrop, the NITI Aayog asked a panel of experts to examine the current initiatives on innovation and entrepreneurship in the country. The panel found that the business environment of the country is unfriendly and not conducive for corporate investment. To improve access to capital, a committee headed by professor Arvind Pangaria, vice-chairman of NITI Aayog is in favour of granting more bank licences, deepening the corporate bond market, giving a level playing field for offshore and onshore private equity and venture capital, and a stable and transparent regulatory and taxation regime.

To change this, the panel headed by Tarun Khanna including Swati Piramal wants the government to take a thorough look at the Companies Act, review Section 56 of the Income Tax Act in terms of investment, frame a bankruptcy law to tackle the non-performing assets of banks and undertake reforms in the labour sector. They also want to lift a ban on employee stock options to independent directors of unlisted companies.

Under the process of labour law reforms, employers should be given a choice of compliance under the Factories Act, 1948 or the Shops and Establishments Act in all non-hazardous industries, and all the 44 central labour laws should be consolidated into four labour codes. The role of outsiders in trade unions should be removed because the politicisation of trade unions is toxic for the Make in India campaign.

The government plans to introduce a bankruptcy law in the winter session of Parliament that would be a key for improving access to capital. The aim is to allow faster closure of troubled businesses and give creditors easier and faster exit options. Therefore, it should expedite the cleansing of bank balance sheets, and allow fresh lending.

Under the present circumstances, the investment is not taking off because of the difficulties mentioned above.

These difficulties and hurdles leading to the delay of projects and in some cases to a complete end of the development of a project leads to losses of the Indian exchequer, loss of livelihood of people affecting their growth especially those who are unskilled and poor as they do not get any other place to earn a livelihood.

No doubt, this gloomy picture of investment must also be abolished so as to create a new wave of optimism. The government must intervene and come forward to counter the situation.

In view of the above, the government must take speedy action for clearances and implementation of projects because even a normal project takes years to complete. Delaying cases due to unnecessary reasons creates a mockery of the existing system which takes unimportant agendas at hand instead of necessary ones. Presently the government is also of the view to extend the boundary of NITI Aayog which may probably ease the situation and a favourable wave of optimism may prevail. 
 
(The author is freelancer writer)

Comments

 

Other News

Taming turbulence in Indian aviation

The booming Indian aviation industry, among the fastest growing sectors in the world, is projected to be valued at $40 billion by 2027. But, despite robust demand for air travel across the country, more than 50 airlines have closed down in the last decade in India and most private airlines have closed with

PM Modi leaves for G7 Summit in Italy

In his first foreign visit after taking oath of office for the third time, prime minister Narendra Modi Thursday evening left for Italy to participate in the G7 Outreach Summit. “At the invitation of Prime Minister Giorgia Meloni, I am travelling to Apulia region in Italy to participat

Some market talk, some gossip – learnings over tea at RBI

A Fly on the RBI Wall: An Insider’s View of the Central Bank By Alpana Killawala Rupa Publications, 248 pages, Rs 595  

Coalition politics not expected to impact India’s foreign policy

Prime minister Narendra Modi has strived incessantly to bring laurels and much needed recognition for the nation since May 2014 when he was sworn in as the head of state. The poser which can be deliberated upon is this: What will be the consequential impact of the new era of coalition politics which confro

New govt`s first decision pushes for farmer welfare

The BJP-led NDA government has started its term with its first decision relating to farmer welfare. Narendra Modi took charge of office as prime minister of India for the third time on Monday, a day after he and his colleagues were sworn in by the president of India. In his fi

Narendra Modi takes oath for third term

Narendra Modi made history Sunday evening as he was sworn in by president Droupadi Murmu for a third successive term. Modi thus becomes the first prime minister since Jawaharlal Nehru to have comptered two full terms and beginning a third consecutive term. In the swearing-in c

Visionary Talk: Amitabh Gupta, Pune Police Commissioner with Kailashnath Adhikari, MD, Governance Now


Archives

Current Issue

Opinion

Facebook Twitter Google Plus Linkedin Subscribe Newsletter

Twitter