The investment rate in India has gradually declined after a historic high in the mid 2000s. Examine the reasons behind this trend. Discuss the steps required to revive investment for a sustained growth. (250 Words)

Mentors Comments:
Briefly write about the investment decline in India.
Discuss the reasons behind the gradual decline of investment rate in India.
Enumerate the steps required to revive investment for a sustained growth.

Answer:
Investment denotes gross capital formation and is one of the principal growth engines of an economy. Investment rate in India has gradually declined from 38% to 27% over the last decade. Component wise, it is the private corporate investment that is responsible for most of the decline in total investment. Between 2007- 08 to 2015-16, out of the total decline of almost 7 percentage points, private investment contributed 5pp. .

This decline can be examined in light of the following reasons:
The onset of financial crisis in 2008 had disrupted the investment decisions. Many world economies are still struggling with its after effects.
Indian economy has been suffering from twin balance sheet syndrome since 2012, where the ongoing projects are stalled and bankers‟ balance sheet is stressed, leading to rising NPAs and declining credit off-take.
High rate of interests because of high inflation during 2010-13 period also led to delaying of investment decisions. Even though inflation has subsided, investors have remained wary.
Litigations in the PPP projects have also discouraged investments.
Unfavourable perceptions about risks and expected returns, for example retrospective taxation laws create an environment of uncertainty.
Insufficient allocation of resources towards technological advancement and logistics has hampered new investments.
Slow roll out of land and labour reforms.
Household savings and investment rates have been falling.
These roadblocks are reversible in nature and must be addressed to revive the investments for sustained growth.

Following steps should be undertaken in this regard:
Quick recognition and resolution of non-performing assets, in order to address the “Twin Balance Sheet problem”.
Recapitalization of public sector banks to recoup their credit making capabilities.
Time bound resolution of insolvency cases, as envisioned and mandated by the Insolvency and Bankruptcy Code
Capacity building and adoption of fixed deadlines for implementation of further changes in the GST programme
Speedy labour and land reforms to further improve ease of doing business. A predictable and stable taxation regime, which gives investors a clearer vision to make decisions.
Increase public investment in infrastructure sector, creating employment. This would pull in private investment, while increasing money supply at the same time.
Make appropriate changes in investment models to make investment attractive for investors, like HAM model.
Renegotiate the PPP projects according to the existing situation, thereby building confidence among investors.

Steps like Make in India, initiatives for quick approvals and clearances, FDI reforms and strengthening bond market for long term financing will further improve investment rate in India. In the long run, it is imperative to create a clear, transparent, and stable tax and regulatory environment to revive and boost investments.

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