08 February 2013, 04:58 PM IST
When the government's Central Statistical office announced on Thursday that the Indian economy would grow by only an estimated 5 % in 2012-13 – the worst in a decacde - some were surprised but not many were shocked.
So why is industry not shocked? Most industry captains, though enthused by the reforms agenda announced by the government post September 2012, have seen the writing on the wall for a while now. The sentiments may be buoyant but they know that nothing has moved on the ground. And that buoyancy can quickly evaporate with the macro economic data filtering in, despite finance minister P Chidambaram, laying out a roadmap to reduce fiscal deficit (excess of expenditure over revenues) over a period.
No Project Clearances:
If all the projects, amounting to tens of thousands of crores, held up due to various problems were cranked up, manufacturing could definitely see an upswing. Sadly, most corporate houses have learnt their lesson and are therefore not announcing any new projects, until they can smell the coffee. It also doesn't help that interest rates are high.
Infact, some CEOs, I have been speaking to have started talking about the fact that despite the hullabaloo nothing has changed on the ground. Clearances are not coming through, despite the highest echelons of the government being aware of the problem. It also doesn't help that these are multi-layered and takes ages to come by. Besides, rampant corruption continues to slow down this process. The result; even their existing investments are getting impacted.
Jobs:
But the bigger question is whether the government is thinking about jobs. The demographic dividend could quickly transform into a social nightmare if the lakhs of university pass outs don't have a job. Jobs can happen only if manufacturing picks up.
Risk is Up:
About five years ago investors entering the country would talk about growth premium. They are now talking about risk premium. What's giving investors sleepless nights is the absence of predictability of doing business. Take private equity investors. While some which invested in the big names have made money, the rest who put their bets on new stories and companies about six years back are still looking at ways to exit profitably. But not only has absence of buyers or liquidity in the system put paid to their plans of exits for now, they have noticed that their profitability has also taken a major hit on account of foreign exchange deviations. Since they benchmark their profits in dollars, the Rupee devalaution from a level of around 40 to mid 50s now has also taken the shine off their investments. And it has got them thinking about making new investments. Is it prudent? Perhaps not.
Tax Collection Drive:
That's not all. Stung by lower tax collection, the income tax department has seen heightened action lately. There has been a spate of notices on corporate houses lately. Interestingly, most of the large ones are on multi-national corporations. Even as Vodafone was recovering from one alleged tax offence, it finds itself staring at another one. Similar alleged tax offences have been slapped on Shell, IBM and Nokia just to name a few. While the veracity of these notices are still not clear, it has definitely made the foreign investors a lot more shaky.
Time to Act:
There are no quick fixes. But the government has to calm down the frayed nerves of the investor community to begin with. The adoption of the Shome committee report on postponement of GAAR, (General Anti Avoidance Rules), designed to nab willful tax offenders, definitely helped. More comfort building measures are needed as the finance minister must have sought to do with his road shows abroad recently.
Fiscal deficit is one area which continues to remain a huge concern, not only for rating agencies, which have warned of downgrades but also for investors. That should be addressed by reducing subsidies and wasteful expenditure by the government. This includes curbing compulsive foreign trips of senior government officials, reducing spends on welfare schemes which apart from the NREGA experience perhaps never reaches the intended beneficiaries and consolidation of government departments. For instance why have a separate steel ministry when the ministry of industry itself can look into it.
Industry is crying for change. These ways to crank up manufacturing have also been known for a while. It's therefore time to act. Unless the government seizes the opportunity in the forthcoming budget it may just be too late.
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