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Another giant leap

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Features, Imtex 2015

To realise its full potential, India needs to continue making progress on its domestic reforms agenda and encourage investments  

After achieving strong growth of over 9% for three successive years between 2005-06 and 2007-08 and recovering swiftly from the global financial crisis of 2008-09, the Indian economy went through lacklustre times that culminated in lower than 5% growth of GDP for two consecutive years, i.e. 2012-13 and 2013-14. A sub-5% GDP growth for two years in succession was last witnessed a quarter of a century ago in 1986-87 and 1987-88!

It is only this fiscal that the Indian economy started showing signs of gradual improvement in terms of business expectations, exports and industrial production. This more favourable outlook reflects stronger sentiment resulting from the new government’s promise to prioritise economic reforms and enhance the country’s business environment. Several decisive steps taken by the government like the industrial corridor development, 8,500km road construction, 16 new ports, and broadened financing base, among others, aim to not only accelerate the pace of infrastructure growth, but also restore investors’ confidence.

Industrial corridors are likely to be the primary drivers of India’s growth in manufacturing and urbanisation. This coupled with allowing 49% foreign direct investment (FDI) in the defence sector and other such incentives provided in the budget, will definitely provide a fillip to the manufacturing sector.

Infrastructure development, which is a key to bring back the strong growth momentum in the economy, received a boost when the Japanese government committed to invest $35 billion over the next five years in India to build smart cities and finance infrastructure projects. Japan will also supply financial, technical and operational support to introduce bullet trains in India.

Economic growth is likely to accelerate in the next fiscal as the reform process continues and begins to bear fruit. The GDP forecast for the next fiscal is driven by a partial unclogging of domestic policy logjam as well as improved global growth prospects.

This, together with improved private consumption demand, is likely to trigger a revival in industrial growth in 2014-15. Sectors such as consumer durables, automobiles and textiles will especially gain from this revival. The mining sector, which has been plagued by policy issues since July 2011, is also forecast to expand for the first time in three years. The mining ban on iron ore in Karnataka and Goa has already been lifted and mining growth will pick up, as firms obtain relevant clearances and resume operations.

We believe that the recent momentum on resolving mining issues will continue into 2014-15 and will help address supplyside constraints for industries, particularly in the steel and power sectors. The integration of south India into the national power grid will help improve power availability for industries in the region. The government has already taken many steps (making funding easier for infrastructure sector, expediting approval process, de-bottlenecking the system, simplifying bureaucratic complexities, restoring confidence of the investors, etc) which can produce visible improvements over the next few quarters.

Key structural bottlenecks to be addressed for growth

  • Difficulties in taking quick decisions on project proposals have affected the ease of doing business. This has resulted in considerable project delays and insufficient complementary investments.
  • Ill-targeted subsidies cramp the fiscal space for public investment and distort allocation of resources.
  • Low manufacturing base, especially of capital goods, and low value addition in manufacturing. Manufacturing growth and exports could be facilitated with simplified procedures, easy credit, and reduced transaction cost.
  • Presence of a large informal sector and inadequate labour absorption in the formal sector. Absence of required skills is considered an important reason.
  • Sustaining high economic growth is difficult without robust agricultural growth. Low agricultural productivity is hampering this.
  • Structural factors engendering continued high food inflation need to be tackled. Issues related to significant presence of intermediaries in the different tiers of marketing, shortage of storage and processing infrastructure, interstate movement of agricultural produce, etc. need to be addressed.

Steps to revive infrastructure growth

Government has cleared 100% FDI in railways except for operations and 49% foreign direct investment (FDI) in the defence sector. Banks permitted to raise long term funds for lending to infrastructure sector with minimum regulatory preemption such as CRR, SLR and PSL. Long term funding will be readily available as banks are in a much better position to mobilize resources.

There’s a proposal to create Infrastructure Investment Trusts (IITs) with pass through benefits, which will make easier monetisation of investments in existing projects and raising resources for new projects. Sixteen new port projects proposed with a focus on port connectivity.

An amount of Rs 116 billion will be allocated for the development of Outer Harbour Project in Tuticorin. Effective steps will be taken to operationalise the SEZs. Development of new airports in Tier I and Tier II cities through Airports Authority of India or through PPPs. Development of inland waterways. ‘Jal Marg Vikas’ (National Waterways-I) will be developed between Allahabad and Haldia to cover a distance of 1,620kms at cost of Rs 42 billion in 6 years.

REITs would attract long term finance from foreign and domestic sources and reduce the pressure on the banking system while also making available fresh equity. To encourage development of Smart Cities, requirement of the built-up area and capital conditions for FDI is being reduced from 50,000 sq-m to 20,000 sq-m and from $10 million to $5 million respectively with a three-year post completion lock in.

Measures for enhancing domestic coal production are being put in place including supply of crushed coal and setting up of washeries. Exercise to rationalise coal linkages which will optimise transport of coal and reduce cost of power is underway. Government will work also towards encouraging investments in mining and resolving issues in iron ore mining. The government will allow online submission of applications for environmental clearances and forest clearances.

Industrial performance

Post 2008-09, the industrial sector, consisting of manufacturing, mining, electricity and construction, showed remarkable recovery and steady growth for three years. But industrial performance in 2013-14 remained lacklustre for the second successive year. There is no denying that industrial revival needs new initiatives to emulate the peak growth achieved in the recent past. It will be interesting to meet the projected Twelfth Plan targets of 10% for the manufacturing sector and 5.7% for the mining sector in the remaining three years!

Indian industry has the potential for further strengthening the agro-processing, textiles and garments, leather and footwear sectors with good prospects for sustained employment generation. But the medium-term challenge for Indian manufacturing is to move from lower to higher-tech sectors, from lower to higher value added sectors, and from lower to higher productivity sectors. Medium-tech industries are primarily capital-intensive and resource processing and high-tech industries are mainly capital and technology intensive.

In order to push the share of manufacturing in overall GDP to the projected 25%, Indian manufacturing needs to capture the global market in sectors showing a rising trend in demand. These sectors are largely high technology and capital intensive. Such high-tech industries may perform a less important role in sustaining employment but are critical for capital accumulation and skills development and for improving the knowledge base. To gain a firm footing in these sectors, the policy thrust should be on pushing up the level of public and private expenditure on technology up gradation, research and development, innovation, and skill development.

Outlook for the industrial sector

The near-term industrial upturn sentiment is surely upbeat due to the continued improvements in the policy environment and hopefully a quick return to peak investment rates. With the improvement in overall macroeconomic environment, industry is expected to revive and growth can accelerate gradually over the next two years.

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