Like globalisation, private initiative is also in trouble
Though it has been happening for many years, Brexit forced us to recognise that global trade is no longer the growth-engine it once was. If global trade rose faster than global GDP in the pre-financial crisis days, it contracted 13% or so in value terms in 2015 and grew a mere 2.8% in volume terms—a far cry from the 5.3% volume growth the IMF was projecting in April 2014. Something quite similar is happening in private investment—as the World Bank pointed out recently, private participation in infrastructure in India is down from a high of $73.7 billion in 2010 to a mere $4.2 billion in 2015 and, within this, the share of PPP is down from $48.4 billion to $4.1 billion. The decline is sharpest in electricity where private investment fell from $37.8 billion to $2.1 billion—in the case of roads, this fell from $14.5 billion to $1.9 billion and from $0.7 billion to a mere $0.1 billion in the case of ports. While that was only to be expected given the severe stress most private firms—especially those in the infrastructure space—are facing, in a post-Brexit world where global growth and financial flows are likely to be further squeezed, it puts more of an onus on the government to increase its spending.
It is true the government has increased its spending on infrastructure, but this needs to be hiked a lot more. Clearly, the fiscal deficit has to be given the go by, but what will make it more palatable is if there is an explicit recognition that the breach is only going to be used to fund infrastructure capex. Alternatively, explicit government guarantees can be given to funding agencies like IIFCL, though this too increases the contingent liabilities of the government. More government-to-government guaranteed projects are another option and the good news here is that with a current account deficit of 1.1% of GDP—expected to rise to around 1.5% of GDP in FY17 since exports are doing so badly—the current account has enough room to be able to absorb such expenditure were it to be funded from overseas government grants.
It is also critical that a decision on the bad bank be taken at the earliest since, it is not until public sector bank balance-sheets are cleaned up that any meaningful lending can take place. And given the nature of vigilance and audit checks on banks, it is unlikely they can sell significantly large amounts of assets to private asset reconstruction companies at a significantly high discounts—this, however, is not such a problem when it is being sold to a publicly-funded bad bank. Many assume this is letting crony capitalists get away easily—in reality, it is not, since, while the banks will take a significant haircut on the loans they will sell to the bad bank, the private promoters will probably have to face a near-complete write-off in equity values. Once again, this will require breaching the fiscal deficit targets—presumably, these are all issues being thrashed out with the new NK Singh fiscal deficit committee.