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Investment climate: On the road to recovery?
It is a simple cycle. You first plan a project, get its investment finalised, and after the requisite approvals, you undertake the project. This often takes over a year.
In developing economies like India, there is a strong correlation between the increase in investments and the overall growth of the economy. In the first quarter of FY14, India's economic growth has been at only 4.4% . This is because One of the factors contributing to this is the reducing private sector investments, arising out of delays in approvals. Removing the policy bottlenecks may re-ignite the investment scenario especially in large projects in sectors like power and telecom.
Here are five key pointers to know about the investment climate in India:
Investments in the previous fiscal
After a strong investment cycle for a decade, India has seen a reversal in trend since 2011-12. T"(This) has further weakened in 2012-13," the Reserve Bank of India said in a study on corporate investment. his is because either plans were cancelled due to rising costs or project approvals were delayed.
As per RBI data, 1,127 companies had intended to invest in 2011-12. This came down to 969 companies in 2012-13. The number of projects sanctioned fell to 425 in FY13 from the 636 in the previous year. Moreover, 32 such projects were cancelled during the current year.
According to media reports, private equity firms are deferring investments worth $1 billion. Companies are scaling back investment because they are not optimistic of the demand. Demand conditions will remain subdued in fiscal 2014 as the economy is expected to grow at slower rate. Companies are not expected to take up new project unless they see a pick-up in demand.
The capital expenditure already planned for 2013-14 aggregated to Rs 1.62 lakh crore, according to RBI. This is nearly Rs 1.3 lakh crore less than the total investments planned for the fiscal year. The shortfall has to come from new investments, which appears to be non-achievable, the RBI said.
The government is making efforts to ease policy bottlenecks to get the economy back on track. It has created a special cabinet committee to speed up clearances of 217 projects worth Rs 10 Lakh crore. The government, in August, cleared infrastructure projects worth Rs 1.83 lakh crore. It also removed hurdles for 34 projects requiring investment of Rs 1.4 lakh crore, predominantly in the power sector.
On its part, the central bank is also making it easier for financing such projects. It eased norms for external commercial borrowings (ECBs) by infrastructure finance companies. It also allowed banks to treat debt of infrastructure projects set up under public-private partnerships (PPP) as secure. This means companies can now borrow at cheaper costs.
Power sector accounts for more than one-third of the planned investments in 2012-13. 969 companies in India planned to invest nearly Rs 2.63 lakh crore in 2012-13, 40.3% of which is in the power sector.