With the private sector reeling under a huge debt overhang, economic advisors to the finance ministry on Friday pinned hopes on public investment to revive the investment cycle and spur economic growth. The Mid Year Economic Analysis for 2014-15, penned by chief economic advisor Arvind Subramanian and his team, made a case for reviewing the fiscal policy mid-term. However, for the current financial year, the mid-year analysis report said the Centre was committed to meeting the fiscal deficit target of 4.1 per cent of gross domestic product (GDP) even as the target was ambitious and a challenge. This is so because a shortfall of Rs 1.05 lakh crore in tax collections over what was estimated in the Budget looms large. That means expenditure cuts are on the cards.
The analysis also implicitly made a case for easing of the monetary stance by the Reserve Bank of India (RBI), saying real interest rates would reach levels last seen nearly a decade ago. “But at that time (in the early to mid-2000s), the economy was over-heating… and today it is just beginning to recover,” it said.
If inflationary pressures, it said, continued to moderate and the central bank substantially overshot its own inflation target, the monetary policy stance would appear tighter still.
For the current financial year, the advisers pegged economic growth at around 5.5 per cent of GDP, implying that economic expansion would be the same as in the first half of the year. India’s economy grew 5.5 per cent in April-September 2014-15, as against sub-5 per cent growth seen in the previous two years. The projection is in the broad range of the RBI’s forecast and towards the lower end of the Economic Survey’s projection of 5.4-5.9 per cent.
But Subramanian told a press conference later that economic growth could be higher in the second half than in the first.
Amid the usual headwinds from the external sector, the advisers said India faced challenges that were mostly domestic.
“The most important among them relates to the experience of the last few years of over-exuberant investment, especially in infrastructure and in the form of public-private partnerships. There are stalled projects to the tune of Rs 18 lakh crore, about 13 per cent of GDP,” the analysis said.
Over-indebtedness in the corporate sector with median debt-equity ratios at 70 per cent is among the highest in the world. The ripples from the corporate sector have extended to the banking sector where restructured assets are estimated at about 11-12 per cent of total assets. Displaying risk aversion, the banking sector is increasingly unable and unwilling to lend to the real sector, the analysis said.
Subramanian said, “We have identified that public investment itself could be an engine of growth going forward. Public investment could crowd in, private investment could complement.” In this regard, he advised the government to consider a case not just for a counter-cyclical but a counter-structural fiscal policy, motivated by reviving medium-term investment and growth.
He said India did not have any fiscal stock problem but a flow problem since the ratio of government debt to GDP had declined substantially over the past decade.
Pointing out that the public-private partnership model had been less than successful, the analysis said there might be projects such as roads, public irrigation and basic connectivity that the private sector might be hesitant to embrace.
“…the lesson from the PPP experience from the past is that given India’s weak institutions, there are serious costs to requiring the private sector taking on project implementation risks. Delays in land acquisition and environmental clearances, and variability of input supplies are more effectively handled by the public sector,” it said.