Saturday, 18 July 2015

Stimulated economy, Sluggish investments | CII’s Investment Tracker


Comprehensive set of measures to restore investor sentiments:

  • ranging across the tax regime, 
  • ease of doing business, 
  • Foreign Direct Investment limits, and 
  • administrative and environmental clearances. 
  • A number of large-scale initiatives have been introduced to act as magnets for investments, including 
    • Make in India, 
    • the Smart City mission, and 
    • Clean Energy. 
  • Interest rates, too, are on the downtrend with strong expectations of further rate cuts, and 
  • the macroeconomic environment has turned benign, despite moderation in global growth and trade.
Impact:
According to CII’s Investment Tracker for May 2015, business confidence stands at the highest levels in the last three years, buoyed by proactive reforms and positive macroeconomic scenario. There has been visibly strong improvement in the project pipeline
FDI also went up.

But investments are still low:
  • While intentions to invest are strong, investors are still facing challenges while implementing projects.
  • There are several reasons for slow investment pick-up: 
    • Before the global financial crisis, companies had built up high production capacities in anticipation of continued demand. 
      • However, demand remains muted in the country following three years of high inflation. 
    • Additionally, delays in land acquisition and environmental clearances have led to a bloated pipeline of stranded and delayed projects. 
    • In turn, this has resulted in stressed bank assets so that banks are inhibited from undertaking additional loan burden for new projects.
    • The high interest rates have been a big deterrent to new investments as projects are rendered unviable. 
    • Low profitability of corporates also reduces available resources. 
    • The elevated level of stalled projects has meant subdued demand down the value chain
    • A still-vulnerable global economic environment has not contributed to the overall investment scenario in India, especially as exports are contracting.
Solutions:
  • The 4 R’s — Regulation, Risk Allocation, Renegotiation and Resourcing — need to be addressed to revive projects
  • Dispute resolution:  Given that 101 projects worth Rs. 25,399 crore are stuck in disputes with the National Highways Authority of India, a stronger dispute resolution mechanism in the infrastructure sector would help unblock funds.
  • Clearances: 
    • On ease of doing business, there is need to shift from a sequential to a simultaneous approval system. 
    • Low-risk industries may be exempted from certain clearances
    • Provision of utilities to new factories should be streamlined. 
    • Certain rules and sections of the new Companies Act impose additional burdens and need to be reviewed carefully. 
    • The NITI Aayog could be designated as the coordination centre for central ministries and States on administrative procedures.
  • Infrastructure projects require continued attention and Prime Minister Narendra Modi’s monthly interaction under Pragati would help speed up infrastructure construction. 
  • Budget funds allocated for infrastructure need to be speedily implemented, including for programmes such as Smart Cities and Digital India.
  • Reduce interest rates
  • A National Asset Management Company may be considered to take non-performing assets off banks’ balance sheets, which would unlock lending for investments. 
  • The financial sector should shift from a bank-dominated system to a diversified regime with multiple financing options, particularly for long-term funding.
  • Special attention is required for credit access for small and medium enterprises (SMEs), and 15 per cent of priority sector lending should be earmarked for SMEs. 
    • Ease of doing business needs to be tackled for SMEs through single windows, self-certifications and e-governance.
    • MUDRA scheme implemented properly
  • Manufacturing: Regarding manufacturing, certain focus industries in labour-intensive and advanced sectors should be championed, including automotives, defence, and textiles.
    • In particular, incentives for Research and Development and Information, Communication Technology and Electronics manufacturing would help reduce imports. 
    • A ‘Make in India Technology Venture’ can be set up as a special purpose vehicle under public-private partnership to invest Rs 1 lakh crore in building a knowledge economy
    • The Digital India vision requires simplification of procurement process and a joint government-industry task force to address challenges. 
    • Start-ups should be supported through a suitable scheme.
    • The government has taken many positive steps for a progressive tax policy
    • Dispute resolution mechanisms, arbitration and conciliation can further help in efficient and time-bound clearance of funds in dispute.
[Source: CII Website, The Hindu]

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