The Investment Climate : Summary of Chapter 4 of the Economic Survey of India

The Investment Climate

Economic Survey 2014-15

Introduction• The stock of stalled projects at the end of Dec. 2014stood at ₹8.8 lakh crore or 7% of GDP.

• For every ₹100 of projects under implementation:• ₹10.3 worth of projects were stalled• For private sector, it is ₹16

• This chapter provides five key take-home messages and two policy lessons

Key Take-Home Messages• Stalling rate of projects increased at alarmingly high rate. The rate is much higher for private sector.

• Good News: Rate has plateaued in last three quarters.Down from 9 percent to 7 percent.

• Manufacturing and Infrastructure dominate stalled projects in Private sector.

• Investment slow-down due to less financing by banks. Leading to constrained future private investment.

• Equity market performing quite well.

Policy Lessons• Public investment needs to step-in.• Efforts must be made to revitalise the PPP model of investment.

• An independent Renegotiation Committee needed.• Need to distribute pain amongst stakeholders from deals gone sour.

Pvt. Sector | Stalled Projects• Stalled projects are alarmingly high and dominated by the private sector.

Tapering in Last 3 Quarters• Stock of stalled projects driven by two factors:

• Rate of stalling• Rate of revival

Back in the Game!

An Analysis of Stalled ProjectsCharacterizing Stalled Projects DimensionComponentsOwnership Public, Private (Indian),

Private (Foreign)Sector Infrastructure: Electricity, Highways,

Airports, ConstructionMining: Coal, IronManufacturing: Steel, Cement, Drugs,Garments, Processed Food

Geography StatesValue In rupeesReason for Clearances: Environmental, LandFuel.Stalling Other raw materials

Market: lack of demand, funds

Stalled Projects (by value) as a

fraction of GDP

Year Govt. Pvt. Total

2011-12 2.0% 5.7% 7.7%

2012-13 1.9% 6.1% 8.9%

2013-14 1.8% 6.5% 8.3%

2014-15

(till Q3)

1.4% 5.5% 6.9%

Source : CMIE and Central Statistics Office

• Private (585) & Govt. (161)

• Lack of promoter interest• Lack of non-environmental clearances• Land acquisition problem• Unfavorable market conditions• Lack of capital investment / shortage of fund

Top Reasons for Stalling across Ownership

Source : CMIE and Central Statistics Office

Balance Sheet Syndrome• Debt to equity ratio is a measure of financial leverage that indicates the proportion of debt and equity used by the company to finance its assets.

• It is rising for India at a fairly alarming rate.

Data

Findings• It has been accompanied by high inflation • The public sector is exposed to corporate risk in the form of public private partnerships, and lending by the public sector banks.

• Unlike many other countries with high debt to equity ratios currently, India’s debt is almost exclusively financed by public sector banks.

Impact on Firm Equity• Increasing stalling rates of big projects• Weak balance sheets• Declining new investments in the private sector

Policy Reforms• Expectation that the private sector will drive investment needs to be moderated.

• Public Investment may need to step in to recreate an environment to crowd-in private sector investment in the short term.

• Efforts must be made to revitalize the public-private partnership (PPP) model of investment.

Continued• Creative solutions are necessary for distributing pain equally amongst the stakeholders from past deals gone sour.

• Solution- setting up of a high powered Independent Renegotiation Committee.

• To involve external experts for a quick and independent resolution of the problems.

To revitalise PPP• Re-structuring the framework

Flaws in existing design

Re-structuring the Existing Contracts

Needed Modifications

Thank You!