Over the last financial year, there has been a constant concern about lack of growth in private sector investment. This, in spite of the favourable demand conditions building up. Consequently, the industrial products sector has not had it easy. Is that situation likely to continue in the coming financial year? Are there specific actions the government has to take to make things easier for the sector?

One important aspect that came in the way of private sector capex was the sector’s low capacity utilisation. This, in turn, was on account of the infrastructure spending not converting into adequate demand built up at factory gates. Two: the consumer demand not staying strong even though there were clear signs of becoming better. Three: the non-performing assets in the consuming sectors resulted in the slowdown in the sale of industrial products. Four: there was – and will be – the fear of dumping of commodities like steel from outside the country given the enormous capacities that have been built up, especially in countries like China. There were signs things were looking to turn for the better.

It is in this situation, demonetisation has created fresh and further concerns about the strength of demand in the coming calendar year. What should the government do?

Clearly, the first thing would be to take the focus away from demonetisation to growth. More than what this does in reality, the public discourse impacts perceptions and sentiment. While demonetisation is something that would undoubtedly result in long-term good, it is vitally important to shift the focus back on economic growth, at least in the collective imagination of the people and industry. This is not going to be easy but it has to be tackled urgently. Unfortunately, this issue continues to dominate the collective thinking at the expense of all the other initiatives of the past.

Given the reality of the situation, it is likely to take some time for consumer demand to pick up strength. While this has been the most important driver of economic growth, it is time to look beyond for the moment – there are several variables and uncertainties at play now. This can only come from demand generated by government investment. It is true that some of what the projects and initiatives already taken up are likely to create some demand. However, it seems like time for a much stronger push that will be required for optimism to return and to create opportunities for the industrial products sector. The best articulated plans still take several months to trigger manufacturing demand. So, the need to do this urgently cannot be overemphasised.

The reality is a number of the big infrastructure projects still are in the domain of the government and will take time to be implemented. For example, the FDI equity flow into construction development seems to have been $110 million in FY16 and $62 million till September this year. These seem like small numbers for the market size India represents. Further, sectors like defence create downstream opportunities over time. Consequently, the investment revival is that much slower. Is it time to partner more with the private sector to get large, complex projects delivered? Is there a need to rethink public-private partnerships (PPP) quickly? Can the government get much better at facilitating investment and stay away from investing? It has not been easy for private companies operating in the infrastructure sector. While it is likely there will be political voices against increased private participation in infrastructure creation, the country may not have too many options. It is only these steps that will create demand for capital goods.

A number of initiatives like ease of doing business or GST (Goods and Services Tax) implementation are important, but none more important than providing an economic rationale for investment. This should perhaps be a big part of the thinking as to how the government wants to facilitate economic growth. Lastly, the window of opportunity may not be endless. With the possibilities of policy reorientation in the US and the consequent impact on capital, interest rates etc., the government may have to act very fast and very decisively.

Source: www.ndtv.com, dated: January 24, 2017