Is the government running out of patience with Indian industry?
First finance minister Arun Jaitley, and then other Union ministers, have over the days following the presentation of the 2017-18 budget had one thing to say: Indian industry needs to step up to the plate.
Participating in a breakfast meeting with a group of CEOs hosted by Open magazine on the morning after the presentation of the budget, Jaitley put it rather bluntly: “The government has done everything under the sun,” he said, before adding, “Foreigners are investing, state governments are investing, the Union government is investing. It is now time for the Indian private sector too to start investing.”
The finance minister did qualify his remarks, saying he could understand that firms were overstretched, but things were improving and it was only time before demand started picking up.
In terms of the macroeconomic outlook, while the government has been able to stay on the course of fiscal consolidation, inflation has decelerated sharply, interest rates are softening and the rural sector is slowly rebounding, though the external sector continues to be a cause of worry.
Later in the evening, coal, power, mines and renewable energy minister Piyush Goyal articulated similar views while addressing the Mint-CNBC-TV18 post-budget event.
“The ball is in your court. Are you willing to take the first-mover advantage? India is probably the world’s largest market today aspiring for a better quality of life,” he said, before adding, “Industry, business and investors have to take a call before somebody else does.”
Sharing first thoughts after the presentation of the budget, another Union minister argued similarly, indicating that the government seemed to be running out of patience.
“They are constantly demanding concessions and lecturing us on what we should do. No government has done so much for business; we worked very hard to reduce red tape and create an ecosystem conducive for business. Yet, all we hear are complaints,” the minister said.
Despite significant increase in public investments, private sector investment has been sluggish. The 2017-18 budget increased the allocation for capital expenditure by 10.7% to Rs3.1 trillion for 2017-18, as against a budgeted growth of 10.6% for 2016-17.
Last month, CMIE estimated that gross fixed capital formation—a key indicator of investment demand in the economy—will contract by 2% in 2016-17 after increasing by 6.1% in 2015-16. The official statistics department had estimated that investment demand will contract by 0.2% in 2016-17, but it did not take into account the impact of demonetization.
The slowdown in private sector investment activity is also reflected in the poor growth in bank credit. As of December 2016, growth in bank credit increased by just 4%, as against an increase of more than 9% in the year ago period, shows data released by the Reserve Bank of India.
Further, credit growth to industry contracted by 4.3% as of 31 December, as against an increase of 5% in the year-ago period. The worst affected sectors were infrastructure, engineering, textiles, food processing and mining.
The muted growth in bank credit comes at a time when banks flush with funds are reducing lending rates but are still not seeing any pick-up in credit demand.
Arguing Indian industry lacks long-term vision, N.R. Bhanumurthy, a professor at the National Institute of Public Finance and Policy, said “The Indian economy has been growing at a rate of 7% plus mainly on account of front-loading of public investments. Private sector is reluctant to invest despite the fact that the government has taken many steps to encourage private investment except for land reforms which is a state subject—GST, bankruptcy code, labour reforms, lower interest rates and steps for resolution of disputes.”