Hiking public investment important, but not enough.Budget has to demonstrate commitment to reforms
The Economic Survey has correctly identified India’s growth problem as being driven by, primarily, a collapse in investment levels, from 38% of GDP in FY08—when India’s GDP growth was 9.3%—to 29.7% in FY14. Given the Survey also identifies stressed balance-sheets of India Inc—a third of firms have cash-flows that are not even large enough to service their interest costs—along with those of public sector banks as a big constraint, this means the private sector has neither the ability to raise equity nor debt to finance investments. Somewhat surprisingly, given the energy being expended by the government in getting its land Act passed, the Survey doesn’t identify lack of land as an important constraint for private sector projects—possibly, this aspect needs a relook. Given India Inc’s constraints, it is hardly surprising the Survey makes the same recommendation everyone has been making for a long time—use public sector investment to kickstart growth and hope that will crowd in private investment.
It is not clear, right now, whether the finance minister will do this by relaxing the fiscal deficit target of 3.6% for FY16, but a few points needs to be kept in mind. One, the public sector cannot, even in the short-term, make up for the lower corporate sector investment—while private investment fell from 17.3% of GDP in FY08 to 11.4% in FY14, government investment fell from 8.9% to 7.8%. Two, in areas like roads and railways, where the Survey plumps for more public investments, it may not just be funds availability that is the problem—NHAI’s awarding of contracts collapsed during the last few years and, as railway minister Suresh Prabhu said on Thursday, land acquisition has all but stopped over the last two years. Three, even if the finance minister wanted to step up capex here considerably, there is enough scope for him to do this within the constraints of the fiscal deficit—R2.7 lakh crore can be got by just lowering government holdings in non-bank PSUs to 51%, R1 lakh crore by selling off FCI’s extra stocks as defined by the Shanta Kumar panel on restructuring FCI and another R0.8 lakh crore can be got by selling off the SUUTI shares as well as the residual equity in Hindustan Zinc and Balco.
Given how investments worth around 7% of GDP are stuck right now, it is important for the government to work on fixing this. Apart from getting the necessary clearances that the government has been working on for the last two years, as our columnist Shobhana Subramanian argues, the government needs to actively work on getting bankrupt promoters out of some large projects—this has the advantage of simultaneously repairing bank balance-sheets. While this looks like a tall ask, it is instructive to keep in mind the role the government played in ensuring SpiceJet and Satyam changed ownership very quickly when they looked like they were going under. Equally, given it is government-owned electricity boards that are refusing to accept the electricity regulator’s solution in the case of two large power projects, the government needs to convince the states the stand-off is helping no one. Also, unless the government makes its stand clear, hopefully in the Budget a few hours from now, on reducing its equity in PSU banks to below 51%—the PJ Nayak committee had provided an excellent roadmap—it is unlikely banks are going to be in a position to lend anywhere near what they need to when economic growth starts reviving. It is, of course, ironic that, in even an investment-famine, the government has done little to address the genuine grievances of big investors like those in telecom and oil—investors who could easily have invested billions each year. And, as our page 1 graphic shows, with over R4 lakh crore of tax disputes pending in various tribunals and courts, it is difficult to see how the trust of private investors can possibly be regained if the Budget doesn’t squarely address the issue.
The Survey does well to address the issue of how anti-poor subsidies are since, while not reaching the poor, they prevent investment—on greater village roads construction, for instance—that would help the poor. Indeed, in the case of the R1.08 lakh crore food subsidy (till January 9), apart from the fact that half the subsidy does not reach the poor, it distorts cropping patterns and, as a result, causes higher inflation and environmental problems like collapsing water tables—which also hurt the poorer farmers more. Fixing 68 years of poor policies can’t be done in one Budget—and the prime minister did well to make a jibe about he wouldn’t curtail MGNREGA since it was living proof of the failure of the Congress party to deliver on growth. But, unlike in the last Budget, the finance minister can no longer be content with signalling direction, he has to make a serious start in fixing the big problems confronting the economy.