Budget 2017 is due to be presented. Stalling of private investments is something that would be playing heavily in the minds of policymakers.
Though the Narendra Modi government in the last few years has rebuilt the economy and put it on a stronger footing—primarily on the back of stronger government finances and spending—the banking sector crisis of NPAs (non-performing assets) and the stalled private investment cycle remains our Achilles heel. Recent statistics highlight the weak private investments in the Indian growth story.
The investment demand is at a five-year low, with the growth in gross fixed capital formation 2016-17 going into the negative territory of (-)0.2% compared to that of 2015-16. The share of fixed capital formation as a percentage of gross domestic product (GDP) has declined from 31.2% in the last year to 29.1% in the current year. The growth of GDP minus government consumption is also at a five-year low; it has declined to 5.2% in 2016-17 compared to 8.2% in 2015-16. These figures point to a disturbing aspect of 2016-17—slump in private investments. The cause of this needs to be understood and the decline needs to be reversed before the increased public spending to compensate for the lack of private investments starts hitting fiscal walls. This budget needs to squarely address the decline in gross capital formation and GDP growth minus government expenditure.
In order to restart private investments, the Indian economy has to go back to its entrepreneurs. Public-private partnerships (PPPs) are another way to restart investments whilst taking cognizance of private investor concerns of risks. PPPs during the United Progressive Alliance (UPA) regime had become an ugly form of exploitation and loot. This government already has the Vijay Kelkar committee report that described a new, more transparent and equitable way to plan PPPs. This report was submitted in December 2015. The report reaffirms my views, especially on the need for strong and independent regulators. This needs to be finalized at the earliest so that PPPs can develop in a sounder, more transparent framework. A clear and transparent contractual framework is also good for genuine investors who do not need to face the risk of future reviews and pressures as governments change. The government must quickly set up a national facilitation committee for the resolution of prickly project issues.
Consumption was the one robust component of growth for the last many years and it’s important that it continue to power our economic engine. Budget 2017 is more crucial and important for the Modi government than even the 2014-15 budget, more so because this budget would have to address any residual fallout of demonetisation for consumption. Without making the mistakes of UPA’s 2008 consumption boost, this government will need to boost sectors like automobiles, fertilizers, cement and also lower tax rates for individuals. A Crisil Research report recently said: “Domestic consumption must be boosted by improving purchasing power, especially among the rural population and workers in the unorganized sector and smoothening transaction process in cash-driven sectors. This will help remove the short-term constraint of low capacity utilization in the industry and pave the way for investment recovery.”
One of the major factors that has been holding back the revival of private capital formation is the miserable state of the Indian banking system, which has been marred by the ever-growing NPAs problem—something that I have been raising my voice about since 2010. Due to the risk aversion of public sector banks, they have started focusing more on personal and housing loans than on corporate loans. There has been a dramatic fall in the infrastructure lending by banks since August 2011, which had an year-on-year growth of 22.89%, to an year-on-year growth of (-) 3.06% in July 2016. I have been arguing for the government’s decisive tackling of this issue—including the creation of a sovereign-backed “bad loan bank” which takes over the bad loans and focuses on recoveries, leaving banks to continue with their lending in a more responsible manner. The banking sector represents a significant problem in attracting FDI (foreign direct investment) and investments. At a recent summit about India hosted by the Milken Institute in the US, investors reiterated that their equity investments or FDI would look for matching rupee credit from the banking systems, and with a banking system that’s perceived to be broken, investments will wait on the sidelines.
With demonetisation, there is now a move to improve the quality of our economy. A myopic obsession with numbers sometimes tends to create a distortionary picture which just helps to cover up disparities. demonetisation has faced the issue of quality of economy head on, and will further improve it over the medium to long term by propelling it towards a minimum-cash digital economy. It is crucial for the government to further push its agenda of creating a transparent and digital economy by lower tax rates to encourage compliance and disincentivize further expansion of the black economy. The government will also need to give a boost to improving and expanding digital infrastructure under the National Optical Fibre Network project, as well as provide incentives to telecom service providers to create last-mile connectivity.
Budget 2017 and the year 2017-18 will prove to be the defining year of the Narendra Modi government. It has already made considerable progress on its promise of transforming India. This year could give it more economic momentum and direction in terms of jobs and investments.
This article appeared in Live Mint on January 27, 2017