Let’s just focus on getting our investment story right
While it is always desirable the prime minister meet top industrialists and economists, any conversation aimed at how India can make the most of the China opportunity—the meeting was titled “Recent Global Events: Opportunities for India”—needs to start off with a reality check. At well over $10 trillion, the size of the Chinese economy means even a 5% growth will yield the global economy $520 billion each year; at $2 trillion, even an 8% Indian growth will not yield more than $160 billion. That said, there are definitely opportunities from the Chinese collapse, but right now, investors are not that bullish about India either—the Sensex has lost most of the gains it made since Modi came to power and is just 2.4% up, and FIIs have withdrawn $3.2 billion in the last four weeks.
Apart from the usual recitation of projects that various industrialists are planning to put up, or the need to make doing business easier, it is not clear what exactly they are expected to say on occasions like this. With both chief economic advisor Arvind Subramanian and RBI Governor Raghuram Rajan present, not surprisingly, a part of the conversation was about the need to cut rates—with SBI chairman Arundhati Bhattacharya present, it included the need for banks to transmit this. Given how real rates of interest are around 12-13%, it is clearly unviable for industry to invest. But the problem is not related to just interest rates. With capacity utilisation levels at 65-70% in most industries—at 6.1 million in FY15, commercial vehicle sales were about a fourth less than the 7.9 million in FY13—it is going to be a while before industry is going to be able to invest, more so since the big growth-driver in the form of China isn’t in good shape any more.
In such a situation, the government’s focus has to be on helping industries that can quickly invest—as Bharti Airtel’s Sunil Mittal said, foreigners were wary of investing in India if local firms weren’t doing this. Telecom firms, for instance, have spent around Rs 80,000 crore in capex in FY15, but are being portrayed as villains by large parts of the government. While providing them more spectrum, and liberalising trading/sharing rules should be priority, as Mittal said, the current spectrum caps prevented his firm from even buying how much it wanted in the last auction round. Similarly, Reliance Industries’ Mukesh Ambani did well to point out that it took forever to even impose safeguard duties—Ambani’s point was, with China’s problems far from over, dumping was only going to increase, so Indian industry was going to keep getting hit. While this got the prime minister to ask officials why it took so long, Ambani did not get to point to how the delays in hiking gas prices were crippling investment by his firm, or how the interminable attempts by the government to scuttle arbitration were getting his global partners jittery. Meetings like this, it is true, are about contributing ideas and not about airing individual grievances, but if these are not addressed, the grandiose plans are unlikely to bear fruit. None of this is to say the government is not working—its plans on roads-capex are doing well, and lowering the DMF rates shows it is getting more realistic about what kind of royalty rates can be charged to miners. The bankruptcy code should be ready soon, though the progress in getting states to take on SEB loans is slow—unless this happens, bank NPAs will soar, making passing on of interest rate cuts difficult. But unless quick action is taken on the low-hanging fruit—it took 6 months just to fix the self-inflicted MAT problem—it is going to be difficult to infuse enthusiasm in either local or global investors.