TOPIC: General Studies 3
- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
- Investment models.
Private Investment in India
What is Private Investment?
A private investment in public equity involves the selling of publicly traded common shares or some form of preferred stock or convertible security to private investors. It is an allocation of shares in a public company not through a public offering in a stock exchange.
Statistics and Recent Trends
- In 2015, India has recorded a 10-year low in investments in public-private sector adding to contraction that pulled down the global investment.
- According to the World Bank, global private infrastructure investment in 2015, though on par with the previous year, was 10 per cent lower than the previous five-year average because of dwindling commitments in China, Brazil, and India.
Recent Economic Reforms
The government in the past few years has taken a few steps which are conducive for the growth of private investment. Some of these reforms are highlighted below:
- Increasing public infrastructure investment.
- Structural reforms in key sectors such as power.
- The long-awaited Insolvency and Bankruptcy Code.
- Latest reforms in Foreign Direct Investment (FDI) increasing limits on FDI in critical sectors.
- Legislative and policy measure such as introduction of Goods and Service Tax (GST), Make in India and other reforms in areas such as labour.
Challenges to Private Investment
- Public investment in India also faces limitations due to the increasing public debt and the government’s strategy towards fiscal consolidation.
- India’s financial and corporate sector balance sheets have been highly stressed lately because of credit-led corporate leverage. This is having impact on the short term credit growth.
- Demand side corporate vulnerabilities have also lowered the scope for private investment.
- The corporate bond market in India is still in its infancy and is relatively small
- Weak profitability coupled with over indebtedness, limits the ability of the Indian corporate sector.
- The problem of indebtedness remains persistent due to weak institutions relating to bankruptcy.
- The Public Private Partnership (PPP) Model needs to be restructured with institutional reforms to make it more viable.
- Bank credit growth especially to industry has been declining significantly in recent years reflecting weakened capital, profitability and asset quality of many public-sector banks. It is these public sector banks which have financed a significant portion of infrastructure.
- Risk inversion in the Indian banking and investment scenario.
- With the consequences of the global financial crisis in 2008, the external environment has remained weak and dull ever since.
Bank Corporate Nexus
The problem of growth of investment in our country is majorly attributable to the inter relatedness between the performance of banks and the corporate sector players. This is a major problem that has to be resolved. India has introduced a series of far-reaching measures to deal with the bank-corporate nexus.
- Increase banks’ loan loss provisions.
- Improve corporate governance of public-sector banks, recapitalize them, and restructure stressed assets in a sustainable way through asset-restructuring schemes.
- To better recognize the extent of the problem through the Asset Quality Review (AQR),
- Implementing the new bankruptcy code.
- Implementing out-of-court debt-restructuring mechanisms.
- Ensure quick implementation of measures to keep a check on the further rise in non-performing assets and aid quicker recovery of investment.
- The government, through the Annual Budget, should show an accelerated approach towards recapitalisation and also introduce incentives for performance and debt resolution.
- The government should also make efforts to achieve fully transparent and provisioned public sector bank balance sheets by the end of this financial year.
- The government should also accelerate plans for the restructuring of weak public banks and the divestment of non-core assets. The financial requirements resulting from these steps can be fitted into the medium-term fiscal consolidation plan in a smooth manner. This will assist in both, broadening of debt markets and enhancing financing inclusion.
All these challenges and problems existing are an indication of the persistent, detrimental effects on growth because of delays in dealing with high levels of impaired assets, low profitability, and weak capital positions of banks that have curtailed the availability of bank credit. Hence, it has to be ensured that the problems are plugged at the earliest to avoid any downgrading of credit ratings, economic growth forecasts and ensuring the revival of private sector investment.
Connecting the dots
- The decline in private sector investments is inter-related with the increase in NPAs and the performance of banking sector. Analyse. Also provide suggestions to overcome this problem.
- As per World Bank, India has recorded a 10-year low in investments in public-private sector. Highlight the reasons and how the economic reforms by the government lately can assist in revival of private investment.
General Studies 3
- Conservation, environmental pollution and degradation, environmental impact assessment
- Disaster and disaster management.
General Studies 2
- Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
Climate change- Raising resources using bonds
- The recently concluded Marrakech conference on climate change negotiations did not lay out any concrete advances on finance pledges.
- This has amplified the need for innovation in financing mitigation and adaptation activities to insure against loss and damage caused by climate change.
- If Paris was about committing to prevent the rise of temperature beyond 2 degrees Celsius, Marrakech aimed to make a noticeable difference in loss and damage.
- The parties approved a five-year work plan on loss and damage. It will begin from 2017 where countries formally address topics such as the slow-onset impacts of climate change, non-economic losses and migration.
- However, developing countries are swiftly realising that financial support for loss and damage (which is not governed by a legally binding framework) from developed countries is going to be very small.
- Hence, they have to find their own way in funding the activities that help in mitigating the effect of climate change, whatever may be the numbers.
India and Climate change
- The current India has witnessed extreme events and changing precipitation patterns for past few years.
- In last 14 years only, there have been 131 instances of major flooding, several incidents of heat and cold waves as well as successive drought years.
- All these events have far-reaching financial impacts.
- A research conducted by the Council on Energy, Environment, and Water (CEEW) with two premier institutes- IIM-Ahmedabad and IIT-Gandhinagar has estimated that direct costs of extreme events spurred by climate change in India are $5-6 billion per annum.
- In addition, the associated economic costs and non-economic impacts are even higher.
- So, India has to gear up to attract and invest trillions of dollars of investment as part of its development agenda and also requires mechanisms to protect these against climate risks.
- If the gigantic renewable-energy targets set up by India are combined with annually rising adaptation spending, the financial needs are massive.
Raising the financial resources
- The world and India in particular are at a critical juncture in climate history where mitigation, adaptation and loss and damage need to be immediately addressed.
- For this, public investments are not adequate. International debt markets, estimated to be around $95 trillion, are the largest pool of capital in the world.
- Hence, climate-resilient bonds are an innovative way for countries to use public money to drive private investment from these debt markets. These will help the underserved climate-adaptation market and near-evenly spread the impact of loss and damage from climate risk between investors.
- A bond is a debt instrument with which an entity raises money from investors. The bond issuer gets capital while the investors receive fixed income in the form of interest. When the bond matures, the money is repaid.
- A climate-resilient bond could take several forms:
- It is the most common form of bond.
- It channels debt capital for projects with environmental benefits.
- Such projects should be predominantly for mitigation activities like renewable-energy deployment, clean transportation which decreases future climate risk.
Specific Public bond
- Here, the climate-resilient bond is a publicly issued bond to insure against the outcome for a specific climate risk.
- For instance, a state government could issue a tax-free bond for 5 year term which is yielding market return.
- In case of major flooding during the duration of the bond issue, the investment is forfeited by the investor and the state government uses it to cover the loss and damage caused by the flooding.
- Hence, there is pooling of resources to protect against the impacts of climate disasters by shared liability by investors.
- This opens up a new set of financiers for loss and damage that has historically been tackled by public funds alone.
- This kind of debt instrument would influence the high government credit rating to attract investors as the market interest rates compensate for the climate risk which are being passed on to the investor.
- In this kind of climate-resilient bonds, the funds that are raised to protect against climate risks are used for adaptation activities.
- It combines two important aspects
- Borrowing from the debt market for climate projects
- Sharing the climate risk between multiple individual investors.
- Such a bond would require public money to pay market or higher rates of return on the investment which would be used for adaptation projects such as flood barriers that reduce the loss from climate disasters.
- If there is a climate disaster, the bond investors lose their capital up to the limited liability of their investment.
- If there is no climate disaster, this bond would work like an ordinary debt instrument with the capital and interest paid out in accord with the terms of the bond issue.
The likelihood of climate disasters is going to increase now. And thus there is need to mobilize additional finance to address the losses from the disaster as well as adapt to the growing climate impact.
The government will have to test and promote several permutations of existing and additional financial instruments in order to invest in environment friendly infrastructure and also adapt to existing and future climate impacts.
The developing countries cannot wait for the climate risks to become real. They have to continuously seek clarity on the pathways of financial support under the UN Framework Convention on Climate Change (UNFCCC) and act upon the same.
Connecting the dots:
- The Marrakech conference did not chart out concrete path on financial resources to mitigate climate change and its effect. In such situation, how can developing countries make their sovereign funding policies for the same? Discuss.