It’s the season for surveys and research. The latest tranche of the Economic Survey is a balanced document that shows a candle at the end of a misty road. It is optimistic, but reasonably candid on limited growth prospects in the short term, lower than its predicted ceiling of 7.5 per cent. This is not a happy tribute to the fastest growing economy. But a survey is just that — an assessment.

Even as the Economic Survey gives careful attention to facts and details, its analysis and commentary must be duly qualified to remain within the confines of government policy and motives, and we must read it accordingly.

Now the Survey is over, the GST regime has launched, real interest rates remain high, industrial growth is feeble, private investment is scant, government may not be able to invest much more, a peaked stock market does not necessarily represent the economy, while good monsoons may lead to robust agricultural outcomes and broad-based demand.

What next?

Considerable ink and airtime is expended on the premise that lower interest rates and resolving the balance sheet problem of banks (forget company balance sheets for a moment) will be the most important kick-starter for private investment. But this may not follow automatically. Sure, investments are taking place but they are neither broad-based nor sufficient to propel the economy and jobs to the desired levels.

Let’s understand the mind of an entrepreneur. For this analysis I focus on the kind that build plans around sustainable profitability commencing in the short to medium-term, and need to invest a mixture of capital and debt in the business. To bleed capital is not their game plan.

I make this distinction because there is more than enough capital available (no debt is needed) for business plans either funded by foreign capital or which revolve around raising and bleeding capital for the most part of a decade. Interest rates or lender health would not matter to them.

Entrepreneurs (whether old, new, with large or small businesses) are diligent. Their intentions are not undue enrichment but to earn risk-weighted returns on invested capital. More often than not they undertake building sustainable enterprises and value that span at least a generation or two.

Surveys exude confidence; many economic participants and commentators wax eloquent about better times, but always “in the future”. However, it is not surveys but assessment of reality by an entrepreneur that drives him to assume business and investment risk. Numerical and soft factors combine to trigger either an action mode or a wait-and-watch mode. Perception becomes a stronger driver than reality.

Enthused by a post-2008 anticipation of high growth, and easier availability of resources, much business capacity was created (in both manufacturing and services).

But capacity utilisation in many manufacturing sectors languishes below 75 per cent with lasting increase not visible, which is surprising at our growth levels. Unless capacities fill up to over 85-90 per cent levels, neither can debt overhang of existing business be serviced nor will anyone consider investment.

Capacity expansions are not incremental, but quantum. So, how can a businessman be convinced that a (say) 33-50 per cent expansion in capacity or an entirely new capacity will generate a viable volume and price combination?

Endurance race

Whether India can endure assaults from many far more competitive economies, which must drool at even the lower end of our growth projections, is far from given at this point. The concept of a seamless market and end-to-end value-chain capture via GST is sound; efficiency will hopefully emerge in a few months after birth pangs. But this is a structural change improving competitiveness, while factors of production have not been aggressively attended to.

There is perhaps truth to the notion that while ease of doing business measured by the needs of a fresh entrant has improved, anecdotal and murmured signals suggest otherwise for conduct of existing businesses. We still spend disproportionate time in fine print and tick-boxing.

Despite government efforts to simplify laws, regulations and procedures, one is unable to exude confidence that an intrusive and micro-management mentality has dissipated; explicit or implicit command-and-control may be on the rise.

One perceives that everything is not broken, yet almost everything is being fixed. One may also need more confidence that the political economy will not be unkind to enterprise and there will be no major policy-led distractions.

In essence, key insecurities and limitations must be examined to find complete truth behind lack of investment enthusiasm; business also needs to be forthright. Government articulators can present reasoned clarifications and evidence-based confidence-boosters — more relevant than the proverbial candle of the survey. At the same time, one expects that domestic businesses and potential entrants will also evaluate afresh and dispassionately the real market potential and breed plans based on sustainable profits and debt service. When one concludes that investment is worth making, it will invariably be financed by capital and debt. Assuming the banks sort out their financials, the key question going forward will be the terms and conditions at which debt will be available and whether a prudent entrepreneur will actually raise debt on those terms?

A queered pitch

In recent experiences of banks and businesses, a few have queered the pitch for many. But I feel lender terms and conditions need to be quickly aligned with contemporary safety structures and ever-increasing obligations of governance for borrowers. Otherwise, no matter what the interest rate or availability of money, a prudent person may find it safer to not borrow or invest.

Loss of peer or systemic respect is as big a risk to entrepreneurs as a financial one. It is vital to respect that entrepreneurs (old and new) will shun risk if they perceive that business difficulty or failure can classify them as delinquent, threaten personal slur or even personal ruin.

I relentlessly argue that commitment of desi entrepreneurs is the surest mantra to prompt future investment. As accompanying reality they must also introspect on the longer-term socio-political-economic scenario and meaningfully exert to occupy their rightful place of pride and relevance.

(Opinion piece by Sidharth Birla – an entrepreneur and former president of FICCI)

Source: Business Line