By Invitation. Loosen the purse strings

The 2014 Parliamentary elections gave a decisive mandate in favour of a stable government. Since then most macro parameters of the Indian economy have shown improvement.

However, slackness in investment, particularly private corporate investment, continues to be a worry and the most commonly used explanation for this has been ‘policy paralysis’.

Stalled projects

Indeed, from 2009, the number of stalled projects began to rise till the Cabinet Committee on Investment (CCI) was formed in late 2012.

Nearly 80 per cent of the stalled projects were in six crucial sectors, namely power, roads, telecommunication services, steel, real estate and mining. Since then, the CCI has cleared a large number of projects. Till May 2014 this number was ₹5.3 trillion which increased to ₹12.8 trillion by January 15, 2016. Projects cleared until January 15, 2016, work out to nearly 10.7 per cent of GDP.

Despite this, investment on the ground has remained lacklustre.

The CMIE CAPEX database suggests that while ‘policy paralysis’ was an important factor in vitiating the investment climate, other reasons, such as lack of promoter interest, lack of funds, unfavourable market conditions, absence of statutory clearances and land acquisition problems too contributed to the slowdown and continue to do so.

Due to decline/stagnation in capacity utilisation and tepid demand conditions, the manufacturing sector is not keen on investing.

Though there is demand in the infrastructure sector due to the huge infrastructure gap, stalled projects have adversely impacted the balance sheets of the corporate sector.

And because most of the debt has been financed by commercial banks, they are reeling under high non-performing assets. As a result, both are in the process of repairing their balance sheets.

A number of schemes, such as 5:25, corporate debt restructuring, and strategic debt restructuring have been initiated to repair the balance sheets of both creditors and lenders. However, this has resulted in limited success. Since exit routes are not easily available for indebted entities, a significant reduction in debt has remained elusive. Weak bankruptcy laws have compounded the problem.

Given the size of the government machinery, a significant proportion of demand in the economy is created though government expenditure. In the aftermath of the 2008 financial crisis, governments across the globe increased spending. Even in India, government expenditure, which was 14.3 per cent of GDP in FY08, increased to 15.7 per cent in FY09 and 15.8 per cent in FY10. It led to higher demand in the economy and GDP growth moved up from 6.7 per cent in FY09 to 8.6 per cent and 8.9 per cent in FY10 and FY11, respectively. However, fiscal stimulus in India, unlike in China, was focused on revenue expenditure rather than capital expenditure. Revenue expenditure increased from 11.9 per cent of GDP in FY08 to 14.1 per cent in FY09 and FY10, while capital expenditure declined from 2.8 per cent of GDP in FY08 to 1.6 per cent and 1.7 per cent in FY09 and FY10, respectively. As a result, the economy witnessed increased demand without commensurate easing of supply-side constraints, leading to higher inflation and consequently monetary tightening. FY11 onwards, unwinding of the fiscal stimulus followed by fiscal consolidation resulted in gradual reduction in government expenditure.

The GDP growth in FY13 and FY14 came down to 5.6 per cent and 6.6 per cent, respectively.

Incremental government spending is crucial for investment revival. Although government capital expenditure shows 25.5 per cent year-on-year growth in FY16, as a percentage of GDP it is still stuck at 1.7 per cent, which is also the average government capital expenditure during FY12-FY15. Clearly, the government needs to step up its capital expenditure urgently as it crowds in private investment.

The writer is Director - Public Finance and Principal Economist, India Ratings and Research