In the run-up to the 2014 Lok Sabha elections, I was often required by the party to hold media interactions on economic issues. A favourite question asked by the media in those interactions was "What will you do to get the economy going if you come to power?" My favourite reply was "We shall end the policy paralysis of the present government and even if we do only one thing, namely, to get the stalled projects worth lakhs of crore of rupees going, the economy will not only move forward, it will start running." I therefore felt happy when I came across news from time to time of the government clearing the stalled projects by removing obstacles. I felt extremely happy when I got the news that the contract for the construction of the stretch between Hazaribag and Barhi of NH 33, which had been pending for long, had been finally awarded to another contractor who would begin work soon. You can imagine my disappointment, therefore, when I learnt that the situation on pending projects front had not really improved in the last 30 months of the present government, while the capital expenditure involved in the pending projects by the end of December 2016 had reached the highest level since December 1995.
Pendency of large-value projects has been the bane of our system for a long time. It was this concern which had persuaded the Vajpayee government to create a new Department of Programme Implementation to monitor these projects and clear impediments in the path of their implementation. The charge of this vital department was given specially to Arun Shourie known for his unflinching commitment to the task in hand. This was in addition to the monitoring already being done by the Ministry of Finance, the Planning Commission and the Prime Minister's Office. It did help, and the number of pending projects and their value did decline until policy paralysis overtook the UPA government in its second tenure in office after 2009. It reached unacceptable levels in 2013 and 2014 and has stayed there during the last two years of 2015 and 2016. The government has created more mechanisms to monitor these projects, the Prime Minister's Office playing a leading role in these arrangements but all this to little avail.
According to a recent
study conducted by the Centre for Monitoring Indian Economy to study the impact of demonetisation on the economy, 80% of the investments stalled during the December quarter were held up because of lack of environmental and non-environmental governmental clearances. Obviously, the government has a lot to worry about on this front. The CMIE also found that while seven to eight projects were announced per day pre-demonatisation, the number had dwindled to three to four post-demonetization. But that is another tale.
The basic problem which afflicted the economy during the last years of the UPA regime was contraction in the demand for investment goods. I have repeatedly said that the sequence we followed during the Vajpayee era for the revival of the Indian economy was to first trigger the demand for investment goods in the economy. We believed that fresh investment and revival of demand for investment goods would automatically lead to more employment and revival of demand for consumer goods and services. We therefore laid a great deal of emphasis on infra projects like highways, state and rural roads, housing and real estate, telecom, railways and ports and, of course, agriculture and rural infrastructure, among other things. This created a demand for investment goods, led to higher employment and, with higher capacity utilisation of the existing industries, fresh investment and creation of new capacities. The virtuous cycle was brought fully into play. This cycle was reversed during the UPA regime and is still waiting to be revived.
According to Madan Subnavis, chief economist of the Care rating agency, "There is less demand for credit because industry is grappling with surplus capacity. Right now, average capacity utilization is 70-72%. Unless it is 80%, there will not be any fresh demand for loans. Banks are reluctant to lend to industry and infrastructure sectors due to their NPA (Non Performing Assets) problem." Subnavis has hit the nail on the head. We are truly in a vicious cycle - with very few new projects, stalled old projects, lack of demand, lack of capacity utilization in industry, huge NPAs in banks, and their reluctance to lend even for worthwhile new projects.
The health of corporates and banks is worse than it was during the global financial crisis of 2008. According to a report published in the
Business Standard newspaper at the end of November, corporate debt-equity level was twice that during 2007-08, while corporate profitability during 2015-16, as measured by return on equity, was half that in FY 08. Banks are in an even worse position. At eight percent of their advances, banks' NPAs were three-and-a-half times that in FY 08, while total bad loans in absolute terms during FY 16 was 11 times the corresponding figure in FY 08. The RBI in its latest financial stability report has warned against a sharp rise in bank NPAs. The stress test indicated that under the baseline scenario, the GNPA ratio might increase from 9.1% in September 2016 to 9.8% in March 2017 and further to 10.1% by March 2018. In the case of public sector banks, the ratio may increase to 12.5% in March 2017 and further to 12.9% by March 2018. It is a grim assessment which cannot be cast aside as inconsequential.
On both counts therefore, namely, stalled projects and NPAs of banks, the record of the government and specially of the Ministry of Finance during the last 30 months of its rule leaves much to be desired, to say the least. Faster clearance of pending projects would have created fresh demand in the economy, generated further employment opportunities and eased the pressure on the banks. This was a key area for urgent attention of the government in 2014 when it assumed office. It should have known, as everyone else knew, that there was an umbilical link between stalled projects and NPAs of banks. Time is slipping away and by a few months later it may well be too late.
(Yashwant Sinha is a senior BJP leader and former Union Minister of External Affairs.)Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.