Date: 16/09/2022

Relevance: GS-3: Indian Economy and issues relating to planning, mobilization of resources, growth and development.

Key Phrases: Private Investments, investment rate, Gross fixed capital formation, Supply chain problems, Business Reforms Action Plan, FDI, National Monetization Pipeline, Labour laws reforms, Code on Wages, 2019, Industrial Land Bank.

Why in News?

• A few weeks after government data showed that the Indian economy was growing at a slower pace than expected, Finance Minister exhorted the private sector to step up investments in the country.

Context:

• In just under a decade, India’s Gross Capital Formation (investment rate) has fallen about 10.4 percentage points from a high of 40 per cent of GDP in 2010-11 to about 29.6 per cent in 2021-22.
• Investment activity has remained muted since 2015-16, with the share of Gross Fixed Capital Formation, which connotes investments in the economy, hovering around 29.6 per cent of GDP.
• Despite a little recovery after the pandemic, at the end of 2021-22, investments were only 3.7 per cent higher than their pre-pandemic levels of 2019-20.
• As per CMIE, in the first quarter of this year, investment proposals for adding new capacities in industrial, infrastructure and services, added up to Rs 3.57 lakh crore. This is only marginally higher than the average investment proposals in the preceding three quarters.
• Private investment is an important component of aggregate demand that contributed more than 73 per cent to the total investment and accounted for around 22 per cent of the GDP during the period 2017-2020. This could be attributed to weak business sentiment.

Reasons for low Private Investment:

• There are multiple reasons for the decline in investments –
  • Supply chain problems,
  • Land acquisition problems,
  • Lack of environmental and other clearances,
  • Lack of promoter interests,
  • Tough labour laws
  • Other regulatory burdens among others.
• In the past, the twin balance sheet problem — an over-leveraged corporate sector and banks saddled with bad loans — was thought to have been holding back investment activity. Since then corporate and bank balance sheets have improved, but large parts of the economy continue to struggle.
• As per a report, 16.4 per cent of the loans availed by MSME under the ECLGS facility during the pandemic have turned bad as borrowers are not able to service the loans due to financial distress.
• Among the informal units, with no access to formal sources of finance through which government support was made available, the stress is likely to have been even more severe.
• Another problem with large government borrowing is that it does not leave any room for private borrowing and investment.

Government Initiatives to boost Private Investment:

• Business Reforms Action Plan:
  • The Department for Promotion of Industry and Internal Trade (DPIIT) has introduced a dynamic reform exercise called the Business Reforms Action Plan, which ranks all the states and UTs in the country based on the implementation of designated reform parameters.
  • The reforms have focused on streamlining the current rules and procedures and getting rid of unnecessary requirements and steps.
• Reforms in FDI:
  • The government has implemented an investor-friendly strategy to encourage FDI, and the majority of sectors are accessible to 100% FDI under the automatic route.
  • In order to keep India a desirable and welcoming place for investors, the FDI policy is also revised frequently. Any changes to the policy are made after extensive consultations with stakeholders, including apex industry chambers, associations, representatives of industries/groups, and other organisations.
• National Monetization Pipeline:
  • The National Monetization Pipeline (NMP) was launched in 2021 to provide a comprehensive view to investors and developers of the available investment avenues in Infrastructure.
  • Over a four-year period, the total indicative value of NMP for the Central Government's core assets has been assessed at Rs. 6 lakh crore (US$ 75.18 billion).
• Labour laws reforms:
  • The Ministry of Labour and Employment has taken a number of steps to streamline labour laws to make conducting business easier.
  • By condensing, combining, and rationalising the pertinent provisions of 29 Central Labour Laws, the Government has notified four labour codes:
    • Code on Wages, 2019,
    • Industrial Relations Code, 2020,
    • Code on Social Security, 2020,
    • Code on Occupational Safety, Health, and Working Conditions, 2020.
• Concessional tax rate:
  • In order to incentivise new domestic companies to set up their manufacturing units in India, the government has extended the concessional tax rate of 15% to March 31, 2024.
• Industrial Land Bank:
  • The government introduced the India Industrial Land Bank (IILB), which is a GIS-based portal - a one-stop repository of all industrial infrastructure-related information - connectivity, infrastructure, natural resources, terrain, plot-level information on vacant plots, line of activity, and contact details.
• Single Window System:
  • In September 2021, Minister of Commerce and Industry launched the National Single Window System (NSWS). The single window portal would become a one-stop shop for investors for approvals and clearances, which would bring transparency, accountability and responsiveness in the ecosystem.

Way forward:

• It is true that the private sector makes business decisions for investment to earn profits. It is important to note that capital goods have a long gestation lag. Investment decisions critically hinge on
  • level of output produced by new investment,
  • taxation system,
  • cost of credit reflected in lower interest rate regime,
  • timely delivery of credit and
  • Business expectations of the domestic and global economy.
• Thus, positive sentiments are warranted to boost investment which should be guided by “spontaneous optimism rather than mathematical expectation.”
• India is presently known as one of the most important players in the global economic landscape. The country is growing rapidly and is expected to become a US$ 5 trillion economy by 2025.
• The need of the hour is increasing private investment in the economy for India to remain on a high growth trajectory.

Source: Indian Express

Mains Question:

Q. “Private investment in economy is important for India to become a US$ 5 trillion economy by 2025.” Critically analyse the statement.