Thought for the day
"The happiness of society is the end of government."
-
John Adams (American, 1735-1826)
Word for the day
Fait
accompli (n)
An accomplished and presumably irreversible deed or fact.
(Source:
Dictionary.com)
Teaser for the day
The wheel turns full cycle. "The Parrot" to make its master sing
2015: Investment cycle not seen reviving in 1H2015 at least
Reviving the stalled investment cycle is the key to the myriad
of problems Indian economy is facing at this point in time, in my view. Simple,
as it may sound; this is the toughest challenge before the government, RBI and
the business community.
In my view, the investment cycle in India is stalled not just
due to normal economic cyclicality. It is congregation of a number of
socio-economic and political factors.
Mostly ignoring sustainability concerns, poor demand assessment,
political impropriety and banker-entrepreneur connivance have led to serious
misallocation of capital and piling up of unviable projects. Irrational and
random political resistance to foreign capital has also impacted the investment
environment in the country.
Y2K led global ITeS boom, easy credit led private investment
surge, Cheap Chinese import led consumer spending and massive government spend
on infrastructure funded by public sector and deficit financing created a
mirage of India shining. The unsustainable higher income-higher consumption and
savings-higher investment effect of all this reflected in data with a lag
during early years of UPA I regime (2004-2007).
The real problem however is that all this liberalization,
investment etc. was done (a) without creating any conceptual framework; (b)
without instituting adequate and appropriate institutional and regulatory
framework; (c) without addressing sustainability concerns; and (d) without making
appropriate financial viability study. This all led to:
·
Rampant corruption in public offices, as
allocation of liberalized national resources to private parties was left mostly
at the discretion of politicians;
·
Widespread obstructions and delays in execution
of mega projects as these projects conflicted with the sustainability objective
and environmental concerns;
·
Advancement of future investment demand impeding
financial viability of projects and creating massive stress in financial
system;
·
Decimation of domestic SME and household sectors
which could not compete with cheap Chinese imports leading to structural
pressure on currency; current account and general employment level;
·
Unmanageable rise in aspirations of youth
population leading to substantial changes in consumption patterns and thus
pressuring household savings and consumer prices;
·
Sharp rise in rural land prices making food
inflation a structural problem.
The consequences are:
(a) Most of the infra
developers and operators are facing serious credit worthiness issues. They are
not in a position to undertake further projects, while the existing projects
are either stalled midway or have become unviable due to a variety of issues.
It is important to note that many of these projects have been
unviable ab initio though few would like to admit.
(b) Banks are not
willing to extend further credit to core sector. The stated reasons are poor
balance sheet and financial unviability of projects. The unstated reason
include the fear and extreme risk aversion amongst individual bankers, which is
quintessentially an outcome of past excesses.
(c) Erosion of banks'
capital base is also a major hindrance in kick starting the investment cycle.
Fiscal constraints of the main promoter (the Government of India); persistent
failure in labor management (unions resisting diluting government stake) hinder
recapitalization of public sector banks.
On the other hand as I write this, a number of large corporate have
already reneged or are on the verge of defaulting on their covenants. The
amount of accommodation loans masqueraded as restructured loan to protract the
default technically are staggering.
A few balance sheets which are strong have the option to choose between
acquiring an operating or partially built asset at favorable terms or undertake
a green field project. To me the choice is but obvious. So how the fresh
investment cycle will get started?
Moreover, we are entering a phase when 2-3years down the line
easy credit situation prevalent in western world may cease. The cost of capital
will start rising for already troubled businesses.
The long term solution lies in opening the Indian markets to
open global competition. The government may provide support to businesses which
have demonstrated their capability to compete with global players. The
inefficient and incompetent should be allowed to fail.
In the short term however, the government will have to undertake
the onus of kick starting investment cycle on itself. The best way would be
create social sector infrastructure, e.g., education, skill development, water,
sanitation and healthcare. The government has rightly initiated some programs
in this direction. The faster and efficient implementation is the key.
Do not expect any meaningful investment happening in 1H2015.
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