The slowdown in investments in India — both domestic and foreign direct investment and portfolio investment — is a cause for grave concern. But this is only a symptom of a much larger problem. Local investments by the Indian private sector and government entities is down to a trickle. High interest rates and the high fiscal deficit are the main culprits. Last week the Reserve Bank of India raised interest rates for the 10th time in just over a year, with very little or no effect on inflation.

But in view of the government’s inability to tackle supply-side issues, the RBI had to look as if it was doing something. While failing to curb inflation, these interest rate hikes have instead succeeded in curbing investment and growth. This is a dangerous situation — for unlike most other emerging economies that depend on exports for their growth, India’s growth is primarily driven by domestic demand. So the fall in investments and high interest rates have already taken their toll in varying degrees on areas like manufacturing, consumer goods, construction, auto, real estate, etc. The corporate sector finds credit expensive and so has been forced to either postpone capital expenditure or to abandon it altogether. The government too has cut down on its expenditure as it has to control its fiscal deficit. It has been unable to reduce subsidies on fertiliser and fuel; but unless it can do this the public expenditure on badly-needed infrastructure such as roads, highways, ports and transport facilities will suffer. Most analysts believe the government will miss its fiscal deficit target of 4.6 per cent of GDP as it simply does not have the political will to curb unproductive expenditure.
A conducive environment is absolutely essential if investments are to start flowing once again. There has to be a clearer picture of where the economy is headed. In today’s India we have multiple uncertainties — over critical issues like inflation, interest rates, the uncertain level of demand, the fiscal deficit and growth levels. And the biggest problem of all is the absence of political leadership, with irregularities even among the higher bureaucracy. This is a major disincentive for foreign investors, who simply do not like uncertainties and delays. While it is true that the overall flow of foreign funds flows has slowed down globally, India is getting far less than the other emerging markets. Major decisions — such as on a fuel policy and a land acquisition policy — have been pending for a long time, and there is no indication when there will be some forward movement. The government seems unable to decide which way to go: given that crony capitalism is so obviously out of tune with the current public mood. Big ticket projects are actually being delayed due to this. Imagine in a country like ours that suffers from chronic brownouts and blackouts a major public sector power undertaking had to back down on generation as the state electricity boards cannot afford to buy power. Most of them are bankrupt and, according to one estimate, have suffered a total loss of around `1.04 lakh crores. In the past few months we have seen a new scam emerge almost every single day, causing huge losses to the exchequer and of course blackening the nation’s image. There can be no quick-fix solution on the investment front in such a scenario, and we will have to live with slow growth. There are some signs of softening in the commodity rates; this to an extent might ease the pressure on inflation and thus on interest rates, which then could lead to more investments and production. But that’s still a long way off.