March 18, 2015
Indian Economy|Capital Markets
Reviving Animal Spirits
By Nitin Desai
The only period of very high growth that India has known, from 2003-04 to 2010-11, was driven by a corporate investment boom. The central economic challenge for the Government in its drive to accelerate infrastructure development and manufacturing growth is a reprise of such a boom. The 2015-16 budget includes several measures aimed at this end. But the mood in industrial circles remains cautious and the Government needs to act fast to stimulate the animal spirits of Indian entrepreneurs.
The answers are different for the corporations involved in public-private partnerships for infrastructure, for manufacturing companies and for small enterprises.
Over the past decade we counted on PPP as the preferred option for accelerating infrastructure development. But it has not delivered. Now the main problem for the major players in the infrastructure space is that they are over-leveraged and in no position to take on new commitments. The Government seems to have recognised this and the budget has provided Rs.70 thousand crores of public investment in infrastructure, mainly in roads, railways. But this number pales into insignificance against the Twelfth Plan estimate of infrastructure investment requirement of Rs1280 thousand crores in fiscal 2015. Quick action on the budget proposal to set up an Infrastructure fund that can leverage additional resources from the market may help. But reviving private sector interest in infrastructure development requires major policy initiatives on matters like tariffs and access to shared network services which are not yet in sight. It may also require an organised effort to clean up the balance sheets of over-leveraged infrastructure companies.
The central problem for manufacturing companies is that they do not see any substantial evidence of accelerated demand growth. Nor can export growth fill the gap with major markets like Europe, Middle East and China slowing down. Make in India is going to take time to show results.
The FMCG companies which benefited from the high growth of rural incomes till about two years ago cannot count on that now, with the lower growth rate in rural wages and the small increases in the MRPs for public procurement. The capex companies were hit by the decline in investment and do not see a revival of orders as yet. Hopefully the budget provisions for infrastructure will help them. As for the basic materials manufacturers they have had to cope not just with stagnant demand but also major controversies on access to mineral resources.
The problems of small enterprises are linked to the fortunes of the larger corporations and cannot be improved in isolation. The budget does include a couple of schemes that will help. One scheme they will particularly welcome is the system for discounting of trade receivables which would greatly improve their liquidity. But small enterprises cannot drive growth though they can be an important part of growth acceleration driven by large enterprises.
But beyond the underlying economic conditions that shape business prospects, the private sector is looking for serious action on the ease of doing business. In the World Bank's ranking India's rank is 142 out of 189. Even this is because a relatively developed capital market gives it a high rank on two measures--protecting minority investors and getting credit. On enforcing contracts its rank is 186 so that only three countries are worse than India, a telling judgement on our delay bound judicial system. On something as central to investments as getting building permits we are 184 out of 189, because of the multiplicity of clearances required.
The Government is committed to improving the ease of doing business and the PM has focussed a lot on reducing, rationalising and combining the many procedures and clearances required to conduct business in India. The budget's promise on this are welcome, particularly in the idea of plug and play PPP projects where bids are invited after all required clearances are secured by the official sponsor, which may also help to contain corruption. But going overboard to dilute the Government's responsibility to protect the public interest and the welfare of the weak, as has been done in the amended land acquisition bill, is not the way.
The budget also had something to say on the problem of exit. When it comes to large corporations the central issue is not exit in the sense that a business closes and uses the proceeds of asset sales to discharge its liabilities to the extent possible. The real issue is the need for an organised procedure to restructure the business and nurse it back to profitability.
This can be done by negotiating restructuring deals with creditors or renegotiating contracts if the other party is willing. There is also a provision under the Sick Industrial Companies Act of supervised revival of sick units under the aegis of the Bureau for Industrial and Financial Reconstruction. Both of these options work outside the framework of bankruptcy laws which allow only for liquidation.
It is not clear what the FM meant when he promised "a comprehensive Bankruptcy Code...that will meet global standards and provide necessary judicial capacity." One example that has often been mentioned in this context is the Chapter 11 process under the U.S. bankruptcy laws. In this court supervised process the debtor can remain in control of his assets provided he puts forward a revival plan that satisfies the court. All other legal proceedings by creditors can be stayed and the court may even allow exemption from other contactual obligations, including on hiring and firing. The difficulty with this type of court supervised process in India is the long delays in the hearing of court cases. Unless and until judicial delays are greatly reduced it may be wiser to tweak the SICA-BIFR process to make it more effective than to rely on a new bankruptcy law.
Most of the options, other than consolidating the process of securing clearances, will take time to work out and implement. But the Government must remember that the ease of doing business was no better than at present in the earlier period of very high growth. Yet corporate investment boomed because the underlying demand conditions and capital market sentiment was supportive. Hence the Government would do well to pay as much attention to these basic economic factors as it does to easing procedural bottlenecks.