10/11/2020 - Indian Economy

KEY POINTS

·         As the RBI noted in its latest monetary policy report last month, investment, already in contraction mode since the July-September quarter in 2019, suffered a further massive pandemic shock.

·         Fixed investment, which almost halved in the first quarter of the current fiscal, continues to face an uncertain outlook given the weak consumption demand and excess capacity in most industries, especially when coupled with stretched balance sheets that cramp businesses’ ability to borrow and invest, according to the RBI.

·         And the government’s ability to apportion more funds for growth-spurring capital projects is hamstrung by a widening fiscal deficit amid a protracted border stand-off, the health crisis and a debilitating revenue shortfall.

·         Asserting that all sectors of the economy were looking up in the wake of the government’s resolute tackling of the pandemic, a 13% increase in FDI flows in the first five months of the financial year as reflective of the global investor community’s confidence.

·         However, what he likely overlooked was that with almost three-fourths of the $27 billion of FDI equity inflows in that period being accounted for by stake acquisitions in a single large telecom company, a bulk of this investment is unlikely to manifest as new job-creating factories or businesses.

·         The Prime Minister needs to ensure that his assurance of stability is buttressed by actions that dispel investors’ concerns over policy flip-flops. Centre separately enacted an ordinance to retrospectively amend the arbitration law, ostensibly to deal with contracts that may be underpinned by ‘fraud or corruption’. The rule changes in wholesale and online trade are another example of shifting goal posts.

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