Can public investments bail out the economyIJ
It is a bit of an irony that at a time when the buzz is about the private sector perking up following the end of policy paralysis with a new Government in power, public investments may end up becoming the saviour of economic growth. At least this is what the Mid Year Economic Analysis for 2014-15 authored by Chief Economic Advisor Arvind Subramanian indicates, when it points out that the private sector, reeling under heavy debts, may be constrained in its bid to fully participate in GDP growth, and that public investments hold the key. Some experts would consider the opinion rather alarmist, pointing out that the debts being talked about arose from various factors, primary among them being lack of momentum in trade and investments over the last five years especially. With a new energy infused, these issues could soon be sorted out and the private sector would again be fit to lead the growth.
That may happen, yes, but for now the economic forecast does rest somewhat heavily on public investments. The corporate sector has to contend with a median debt-equity ratio of around 70 per cent — which by any account is high and worrisome and points to the huge loans that the corporate world in the country is saddled with. This debt-heaviness in turn impacts other areas such as the banking and the financial services sectors which are exposed to trouble, as they are lenders of the money. To make matters worse, the recent cancellation of licences for 2G Spectrum and coal blocks accentuated the plight of the private sector which had invested in these commodities, taking huge monies from banks to fund their ventures. But then, public investment will only revive if there is a clear roadmap for it and public sector organisations are given the professional freedom to perform by market standards and live or die by those standards.
Whatever the source from which investments come, the Government has to get its act together before the Union Budget, which is just two months away. There are certain things happening that are conducive to an economic push. Inflation is on a downslide (with wholesale inflation reaching zero in November 2014 when compared to the same month in 2013) and economic growth is pegged at 5.5 per cent — this is not bad considering that growth had been at sub-five per cent for the last two years. On the other hand, the Government could find difficulty in keeping the fiscal deficit at the projected 4.1 per cent of the GDP. It had been the predecessor regime's commitment and the new Government had gamely taken it on. But with tax receipts already falling short by more than a lakh crore rupees, the only way the Government can meet the projected deficit figure is by slashing Government spending in the remaining months of the current fiscal. That move in itself could have some adverse impact on growth — either social or economic or both. The Government indeed has difficult choices to make.