Excessive land, environmental regulation cause investment slump

Increased uncertainty along with deteriorating business confidence has also played a key role

The slowdown in investment growth over the last five years partly came about due to difficulties in land acquisition, delayed environmental clearances, infrastructural bottlenecks, problems in coal linkages and ban on mining in some areas, according to Economic Survey 2013-14.

Volatile inflation

The slowdown in corporate investment, the Survey says, might have occurred due to high and volatile inflation coupled with heightened global uncertainty. A subdued business environment and bleak business confidence might also have caused the slump in investment rate, it suggests.

Citing different studies, the Survey ponders whether the ‘real’ or the ‘nominal’ interest rate better explained the reduction in investment rate. “A lower real interest rate can stimulate growth and investment, provided it was not achieved via higher inflation,” it says, citing a Reserve Bank of India study.

The nominal interest rate, however, was more important for investment planning at the firm level. The Survey says that the decline in cash flows of corporates could also be attributed to sluggish demand, weak pricing power, high input cost, and delays in the collection of receivables after delivery of orders.

Nominalinterest rates

Through another study, the Survey underscores the importance of nominal interest rates. “While real interest rates explain aggregate investment activity better than nominal interest rates, they account for only one quarter of the explained investment downturn,” it argues.

It further says standard macro-financial variables did not fully explain the recent investment slump. “Increased uncertainty along with deteriorating business confidence has also played a key role,” it points out.

Need for structural reforms

Lowering nominal interest rates, it argues, might provide short-term relief from interest burden but in the medium term, lower rates with “little slack in the economy will lead to further inflation, affecting investment adversely.

Therefore, structural reforms and resolving supply-side bottlenecks are the key to incentivising investment,” the Survey suggests.

Published - July 10, 2014 12:49 am IST