If public sector companies raise their FY13 capex by Rs.28,000 crore, should we worry that much about rating agency Crisil’s survey that says private firms will lower their capex by R72,000 crore? Not only can PSUs be exhorted to invest more, CMIE’s well-publicised CapEx database suggests quite the opposite. Sure, CMIE says, the number of projects being shelved—primarily due to unavailability of land—are up dramatically, but then so are the number of projects being completed every year. According to CMIE, the number of completed projects rose from R1 lakh crore in FY05 to R3.4 lakh crore in FY11 and this will grow to a likely R5.8 lakh crore in FY13. The reason why you should worry is that the macro numbers—while Crisil and CMIE samples are talking of R3-4 lakh crore of capex in FY12, the actual number in the year was over R26 lakh crore—show a definite slowing. From a whopping 22% growth in FY08, gross fixed capital formation (at current prices) growth reduced to just 12% in FY12. As a proportion of GDP, it is down from 32.9% in FY08 to 29.5% in FY12.
Even this, however, is just one part of the story. The real story is that, over the past 7-8 years, the public and private sectors have complemented each other, with one growing fast when the other slowed, and we’re now in the public sector slowing phase—apart from being in bad shape, with public sector savings a mere 1.7% of GDP. Between FY05 and FY08, the public sector grew at 5.9% per year while the private sector grew at a faster 9.7%. This is the time when both the public sector and the private sector were seeing savings rising. While public sector investments rose from 7.4% of GDP to 8.9% in FY08, private sector investment surged from 10.3% to 17.3%.
Then came the global financial crisis along with the great splurge in India’s deficits, combined with the government not clearing projects and giving reforms the go-by—what, in short hand, is called policy paralysis. While public sector savings collapsed from 5% of GDP in FY08 to 0.2% of GDP in FY10, those of the private sector fell much slower, from 9.4% to 8.2%. While public sector firms continued to invest, even if at a lower pace, the private sector decided to stop investing even though it had the cash—this was due to higher interest rates that made projects unviable at the margin, but more due to the famed policy paralysis. Between March 2008 and March 2012, cash holdings rose from R147,000 crore to R270,000 crore. So, today we’re in a situation where, while the private sector is reluctant to invest—between FY08 and FY11, private investments are down from 17.3% of GDP to 12.1%—the public sector is way too bankrupt to invest. The only way GDP can get back to higher growth is if investment levels rise. But, as Crisil’s survey points out, as long as policy paralysis is not addressed, this isn’t going to happen.