Union Budget | The one number that shows why Nirmala Sitharaman should focus on reviving capex

A revival in private investment is a necessary condition for the Indian economy to achieve high and sustainable growth. But here’s the bad news: data from the Centre for Monitoring the Indian Economy (CMIE) shows project announcements falling to unprecedented lows in the June quarter.

New project announcements totalled just Rs 43,450 crore in the June 2019 quarters, shows the data. That’s a fall of 87 percent from a year ago and an 80 percent dip from the March 2019 quarter.

Two things need to be borne in mind here.

One, CMIE project data comes with a lag and is revised subsequently, even upwards. New projects data for the December 2018 and March 2019 quarters, for instance, have been nudged up by around 5 percent and 13 percent respectively in the latest data release. But even if the June quarter new project announcements of Rs 43, 450 crore are doubled, it would be a sharp fall from previous quarters.

Second, the uncertainty surrounding the elections could be one reason why businesses, and even the government, held back on announcing new projects. Such a trend was seen earlier too. For instance, new project announcements fell by 42 percent and 19 percent year-on-year in the 2009 and 2014 Lok Sabha election quarters.

But having accounted for these factors, the fact remains that the fall is still unprecedented since CMIE started collating this data in the September 2004 quarter. Indeed, new project announcements have never fallen below Rs 1 lakh crore during the last 59 quarters.

What about projects under implementation?

The CMIE data shows that work is underway on Rs 110.8 lakh crore worth of projects as at the end of June 2019. That’s a slight comedown from the Rs 111.3 lakh crore projects being implemented at the end of March; but higher than the year ago figure.

Moreover, the stock of stalled investment projects climbed to a record Rs 12.97 lakh crore at the end of June 2019. The stalling rate, or stalled projects as a percentage of total projects under implementation, was 11.7 percent at the end of June. It hasn't really changed much over the past several quarters. Note that projects could be stalled for multiple reasons including lack of promoter interest, unfavourable market conditions, lack of clearances, land acquisition problems, lack of funding and so on.

These numbers taken together clearly show that there is much uncertainty surrounding investments. The government does not have the fiscal space to push up capital spending (its capex in the first two months of this fiscal fell one-quarter over a year ago) while the private sector is jittery especially since consumption demand is also slowing.

But for reviving economic growth and creating much needed jobs, private investment is the key way forward. As the Economic Survey 2017-18 puts it, deeper an investment slowdown, the slower and shallower the recovery.

However, “at the same time, it remains true that some countries in similar circumstances have had fairly strong recoveries, suggesting that policy action can decisively improve the outlook,” the survey advised.

Finance minister Nirmala Sitharaman has her task cut out.