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Will infra revival boost economy?
Thu, 9 Jul Pre-Open

The turnaround in the economy has been pinned on hopes of a pick-up in the investment climate as the government expedites the process of clearing regulatory hurdles. However, such optimism needs to be taken with a pinch of salt.

According to a report by UBS Research, only 25% of the 540 projects analyzed by it are likely to contribute to economic growth on getting a regulatory clearance. The remaining 75% of the projects have been stalled for reasons other than delay in getting the regulatory nod. The reasons vary from non-viability or shortage of promoter funding whereas in some cases the projects have already been completed substantially.

Acceleration in the clearance process is likely to result in capital investments of US$ 3.7 bn, US$ 6.6 bn and US$ 9.5 bn in each of the years till FY18. This together will account for a mere 2% of the overall capex during the period resulting in a small rise in order for capital goods companies, as per the report.

Therefore with not much capital spending likely to happen in the corporate sector, the ball now lies in government's court. However, capital spends by the central government in May were reportedly lower on a year-on-year basis. There has been no increase in budgeted spends for FY16 by the governments of 16 states either. But with the central government imparting more autonomy to states, it now needs to encourage states to compete with one another in winning large projects by incentivizing the whole process.

In addition, the government can prod state-owned companies to utilize cash reserves by investing through joint ventures. The government also has the option of raising funds from the domestic and overseas markets to spur the investment-led growth in the country.

Thus, expecting an economic revival solely through the clearance of stalled projects is probably expecting too much. Therefore, apart from easing the regulatory framework, the government will have to do the hard work of engaging state governments for their active participation in projects to jumpstart the economy.

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