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MK Venu is Executive Editor of Amar Ujala publications group)
The uptick in sentiment and confidence that was reflected after the Modi government came to power seems to be waning as some economic indicators clearly challenge the narrative of a near term recovery in the economy.
The one question being raised is why the rupee is suddenly weakening if global investor confidence in India is at an all-time high. The exchange rate last week had flirted with Rs. 63 to a dollar mark. October and November have also seen a doubling of gold imports as compared to previous months. Such a dramatic rise in gold imports does not necessarily signify a new fillip for productive investments.
Particularly worrisome is the latest data showing a 4.2 per cent negative growth in industrial production for October. This shows that ongoing investment projects totalling Rs 6.3 lakh crore, which were already in the pipeline early this year, are not moving forward for various reasons. Infrastructure projects, particularly in the road sector, are not moving because private companies building them are either strapped for cash or engaged in disputes relating to execution with the government. It is telling that a highway project in Modi's constituency, Varanasi, has not progressed at all over the last six months, inspite of having been launched in 2013.
A report in The Economic Times last week quoted prominent industrialists who, in an internal review meeting at the CII (Confederation of Indian Industry) expressed a lot of unease about economic recovery, especially over the current infrastructure bottlenecks. In the infrastructure sector, the NDA is now gradually realising, there are intractable issues that go well beyond the "legacy problems" which is easily attributed to the previous government.
Private operators too have to contend with wrong judgement in assessing their capacity to manage these projects. The NDA is now having to deal with the mistakes made by private operators in judging the risk-reward equation in infrastructure projects such as roads and power. I have a suspicion that even now private operators want to cut their losses and get out. Some of them did it over the past two years. This was easy under the UPA, especially in recent years, when politically everything could be blamed on an inefficient and corrupt government. The private operators didn't have to look within, at their own mistakes. The NDA regime is now asking the private operators to walk the talk while promising to clear all policy and regulatory hurdles. However, the government cannot take the responsibility for over leveraged balance sheets of private operators. This is what haunts many projects in the infrastructure space.
In the non-infrastructure sectors there is a genuine lack of demand, which governments can do nothing about. ICRA (Investment Information Credit Rating Agency Ltd)'s Chief Economist, Madan Sabnavis, has pointed out that Indian Industry is today working at just 70 per cent of built-up capacity. In 2011-12 industry was operating at 77 per cent capacity. This shows there is over capacity looming on the horizon. In such a situation, fresh investment cannot be expected any time soon.
So we face one set of problems in the infrastructure sectors where demand does exceed supply. In non-infrastructure sectors we are faced with over capacity due to demand contraction. This could get worse in the coming year because rural demand, which is critical, could further contract as global food prices have dropped by 20 to 30 per cent. The farmers' income growth could therefore decelerate in 2015. Nominal rural wages grew handsomely by 17 to 19 percent for a few years until 2012 end. That was triggering higher inflation but also helped demand growth.
From mid 2013 onward real rural wage growth is at near zero and this will certainly impact medium term demand. There is also some output slowdown being anticipated by experts in the agriculture sector which consistently recorded around 3 per cent growth in recent years. Agriculture production growth could also slip in 2015. In short, many domestic challenges for Narendra Modi and Arun Jaitley. In 2015, Modi may have to shift focus from foreign to domestic policy.
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