In order to boost investment sentiments in a tough economic environment, the Government has raised FDI (Foreign Direct Investment) limit in 12 sectors with some caveats. These include telecom and defense. In telecom, the Government has allowed 100% FDI. The move has been cheered by the Indian stock markets.
We all know that investment is a key component of GDP growth. Higher investment translates into to higher economic growth. As per the outcome of the recent survey conducted by Confederation of India Industry (CII), 44% of respondents plan to increase domestic investment in FY14. This on the surface may bring relief at a time when negative sentiments cloud the Indian economy. However, in a country like India, the problem is not with intentions to expand. There is a huge demand and scope for growth and investment across the sectors. But the potential remains untapped because of the bureaucratic delays, ridiculous policies and lack of clarity.
Take for example the oil and gas sector. India has a huge unmet demand of energy. The share of gas in India's energy basket is much lower than the global average. However, the policies on gas prices in the past and lack of clarity on the subsidy sharing mechanism have made companies skeptical about investment and further expansion.
The survey outcome suggests that 37% of the CEOs expect an increase in their investment outside India, while 50% expect it to remain unchanged. Also, 37% of the respondents don't see a decline in the investment level in FY14. While all this seems positive, it will all depend on Government's ability to speed up the reform process. While the latter seems to have begun, the key lies in the implementation. And if track record is anything to go by, the Government has been a non performer in this regard. An example of this can be seen in the case of lifting limits on FDI in mutibrand retail. Almost 9 months have passed and not even a single player has entered. This is because the policy still remains quite complicated and unclear.
A key trigger to investment will be a cut in the policy rates. As per the survey, 24% of the respondents expect rate cut to be the top most policy action. However, the fall in rupee versus the dollar makes us skeptical about that. In case the situation does not improve, RBI may have to intervene in a way that raises cost of borrowing for companies. This will jeopardize the investment plans. Also, the fate of domestic currency will depend on the state of country's fiscal health. As election year is approaching, we will not be surprised to see some populist measures take a toll on country's economic health. Food security bill is a glaring example in this context.
As far as GDP growth is concerned, 80% of the respondents do not see GDP growth for the current year crossing 5.5 %. A majority suggests that a turnaround in growth is likely to happen only next year, conditional on clearance of multiple projects waiting for Government approval. We hope that the policymakers will take a note of this and clear the obstacles that limit the economy from realizing its potential.