Focus on investment

The national budget preparation for 2016-17 is appearing to be a daunting task before Finance Minister Arun Jaitley in view of somewhat unprecedented ensemble of pre-budget economic and political turn of events. Few Finance Ministers in the past have faced a situation as difficult and tricky as the current one with economic positives being heavily overshadowed by a host of negatives on which the present government seems to have little control. The massive bad loans on the books of public sector banks; stock market collapse; poor performance of the core, manufacturing and infrastructure sectors; falling exports for 14 months in a row;  high retail inflation; steadily sliding Rupee; rising gold import; unemployment and growing political campaign against the government – from the President’s rule in Arunachal Pradesh to the police action at Delhi’s JNU --  by the opposition seems to have overtaken some good work done by the Centre about the opening up of economy, ease of doing business, financial inclusion, and transparency in policy making and execution.

While the good works being done by the government are meant to have more of a future impact on economy and the society than leading to instant results, the administration has achieved little in addressing immediate economic concerns and in converting the windfall benefit the energy-starved nation derived from the gradual petroleum and natural gas price collapse in the global market within months after the BJP-led NDA government installed at the Centre. Somewhat inexplicably, the country’s continued large gold import agenda substantially negated the benefit derived from the lower oil import bill at a time when India was consistently losing its export market following a global commodity collapse.

In 2015-16, the government may ultimately save about 40 percent in its oil import bill. In 2012-13, oil import cost was $164 billion out of its total import bill of $491 billion. The huge oil import bill was primarily responsible for India’s record current account deficit (CAD) of 4.8 percent, that year. According to an ICRA estimate, average Indian basket price of crude is likely to stand at $49 a barrel in FY16 compared to $84 a barrel in FY15. The difference translates into $35 a barrel or a total of $48 billion savings on oil imports. The value of India’s oil imports would stand at $65 billion in 2015-16, compared to $113 billion in FY15. Did the government convert the benefit into an opportunity to invest large in the country? The PSU disinvestment by the government is not helping fresh wealth creation for the country which it normally should. Nor did it help the government take appropriate programme to beat the slowdown in the important brick-and-mortar sector. The government – neither under the UPA, nor under the current disposition – used the disinvestment proceeds to insulate the real economy by ramping up public investment to unleash domestic employment and demand. It may be mentioned that the failure to push the GST bill through Rajya Sabha has practically nothing to do with the current pressing economic negatives. There is no guarantee that it will raise investment in capital and employment-intensive sectors.

Given the limited choice before the government to seriously tackle the current economic negatives, the 2016-17 national budget would do well to launch at least a dozen high-value, hi-profile infrastructure and core sector projects. This will help in creating a sort of economic miracle that will also silence the critics of India’s slow pace development in a number of key sectors. Since the Modi government came to power in May 2014, there has been a ceaseless campaign on the need for investment in electronics and ITES. The campaign has started paying off. Almost all global majors in the two fields, including a host of firms from China, have positively responded to the campaign. Large foreign investments have been pledged.

Global electronics and IT firms are setting up ventures in India. The government itself has committed large funds to promote the national optic fibre network (NOFN). This is very good. But, the electronics and IT industry alone can’t help feed the country’s 1.3 billion people. India needs basic goods and services, including agriculture and farm products, housing, healthcare, education, roads, ports, water supply, good sanitation and social infrastructure like playgrounds, parks, libraries and clubs. It needs strong physical and social infrastructure. In a developing economy such as India, the government – Central, state, and local bodies – must invest in such projects if the country’s profit-oriented private sector enterprises don’t come forward to these activities at this stage.

The government should act as a co-promoter of select infrastructure and core sector projects with, if necessary, participation from overseas investors -- since domestic private sector finds projects with long gestation period unattractive -- offering them the mandate to build and commercially operate the projects. The government may later sell its equity stake, partly to the co-promoters and partly to the market. The budget 2016-17 must usher in such government investment initiatives, which will flow in tranches as the projects progress. The fear of a larger budget deficit should not hold such projects in a developing economy. India has to learn more from Keynesian economics to boost growth and employment under its present state of development than from modern day laissez faire or market economists. Let the inflation continue for some more time till the supplies improve. The government has to act as an employment and demand driver.

The size of the 2016-17 budget is expected to be close to Rs. 20 lakh crore. At least 15 percent of the total expenditure should be earmarked for direct government investment in the infrastructure and core sector projects. The “Make in India” message should enthuse both the public and foreign private investors to set up projects in the country. This will positively rub off on the stock market, improving earnings per share and encouraging fresh private investments in a host of sectors—from steel, coal, cement and capital goods to FMCG, auto, chemicals, and pharmaceuticals. The coming budget provides a great opportunity to the government to tone up the economy and make fresh large investments to create new jobs, income and domestic demand.