Why the private sector is not investing

The private sector is really scared of ad hoc decisions taken by politicians, be it demonetisation, the nation-wide lockdown and many others

Last month, Finance Minister Nirmala Sitharaman asked the private sector why they are not investing in India. She cited several positive policy measures taken to improve the investment climate, including rationalisation of taxes, introduction of production-linked incentive schemes, etc. What she forgot to mention was the random policy interventions of her government, like the sudden imposition of regressive taxes on steel exports, the windfall tax on oil refiners, and the ad hoc stoppage of rice and wheat exports when the FCI data says that India’s granaries are full and overflowing. The misleading FCI data, which will perhaps never be corrected, even causes the Prime Minister to retract statements made on India’s food export capability.

India is probably the only nation in the world where you are penalised if you are internationally competitive. The private sector is really scared of ad hoc decisions taken by politicians, be it demonetisation, the nation-wide lockdown without warning, and many others, but they do not want to speak against a government that has a mammoth majority in parliament and a massive social media and political following on the streets.

So, it was indeed surprising when Tata Steel MD & CEO TV Narendran spoke his mind. “India should be a big exporter of steel. Steel investments happen in some of the poorest parts of the country. We are blessed with iron ore. This is the classic opportunity to make in India, for India and for the world. So, the imposition of export duty is unfortunate”.

He explained that Tata Steel, which doubled its capacity to 20 million tons per annum in the last eight years, wants to touch 40 million TPA by 2030. But it will need to export 10-15% of its goods to achieve that target, and hence he sought removal of the export tax. “Why should people begrudge an industry or a company making profits?” he asked, saying that the steel industry had already announced an investment of Rs 1 lakh crore.

History shows, however, that the Government of India, whichever be the political party in power, starts punitive taxation the moment it finds a healthy industry, and that scares the industry from investing heavily.

But today, the government needs private sector investment because of the massive FII withdrawals. It is the fleeing dollar more than the rising dollar that has been troubling the world for the last six months. It is something that each national government should have countered with measures to boost forex revenues. US direct investment for 2021 was around $1 trillion in the UK, around $120 billion in China and Japan, and around $45 billion in India. With the US Federal Reserve raising interest rates sharply, a lot of that investment is returning to America.

India should have made attempts to boost exports and reduce the current account deficit (CAD). Instead, it taxed steel exports. It lost an opportunity to earn around $60 billion in forex, while the RBI spent another $100 billion defending the rupee, which nevertheless sank 10% -- from Rs 75 to a dollar in March to Rs 82-plus in early October.

The US initiated its ‘Investment Pullback’ strategy when it realised that Russia had found ways to trade with over 70 nations bypassing US sanctions and the SWIFT system. This was its economic warfare plan to make it difficult for Russia and its supporters.

For the whole of the last decade, US interest rates had remained close to zero despite occasional inflationary pressures and several conflicts in Europe and the Middle East, where the US was involved actively (with foot soldiers) or behind the scenes (arms supplies). Though consumer prices rose in the US and inflation had reached 8.5% before March this year, no action was taken on it because employment generation was steady. But after the Ukraine conflict, the Fed started increasing interest rates every month, stating that it was a measure to curb inflation. The interest rate, which exceeds 3.25% today, the highest since 2009, is expected to rise by another 100 basis points this year.

The next quarter could see an all-out economic war of US capital versus Russian resources as America prepares to starve Russia, China, and their supporters of the much-needed American investment that lubricates the global supply chain. While Europe would be hit the hardest, all Asian nations will also struggle. Meanwhile, Golden Visa schemes in Dubai, Portugal and the US are luring thousands of Indians to invest and move their wealth abroad. The rupee has fallen from 61 to a dollar to 82 in the past eight years. India needs to reverse its anti-export stand so that the rupee is stable and CAD does not grow.

(The writer is a journalist and author of three books on economic governance)