The Investment Quandary

Source: Financial Express

The finance ministry is itself unsure of the amount it spends towards capital expenditure in the economy. There is a good reason for it. The Indian government has been far better at providing stimulus to the economy by propping up consumption than through investment, so it makes a hash of counting its investment numbers, too.

The forthcoming budget will consequently be salutary for the economy if it recognises this problem in the framing of its economic logic. There are already welcome signs that Prime Minister Narendra Modi’s team accepts this logic and is keen to push the private sector to deliver rather than depend on the government to spend for additional investment. From this perspective, ordinances to relax the land acquisition law, on insurance and on arbitration make a lot of sense.

By the latest audited figures, the Central government had spent just Rs 87,814 crore as capital expenditure in FY’13, excluding the sum handed out to the railways and the sum set aside for buying defence equipment (mostly overseas). If we add those, the total capital budget will still be Rs 1,82,445 crore, or less than 13 per cent of the Centre’s annual budget. As a percentage of the GDP, it is less than 2 per cent. If we calculate via the audited figure roimage20ute, the sum rises by a princely Rs 4,576 crore compared to FY’12; by the finance ministry route, it is Rs 8,278 crore.

But by its own reckoning, the ministry estimated that it signed cheques for Rs 1,66,858 crore, or about Rs 15,000 crore less than what the audited figures finally showed. Not that it made much difference. Unless budget accounting practices are drastically turned around, these differences could crop up again.

Just compare these puny levels of capital expenditure (audited or unaudited, in the chart) with the normative levels of capital spending the 13th Finance Commission recommended for the economy in this period. The achieved rates are almost half of those flagged by the commission under Vijay Kelkar. For just one year — the one about to end — the deficit in government investment expenditure is Rs 3,42,639 crore. It has not been reached by a long shot and there is little chance that Finance Minister Arun Jaitley is pencilling in any figure that will be comparable for FY’16 too.

The logic is clear. Expecting government investment expenditure to revive the economy does not take into account the high capital-multiplier (that is, wastage) and the small sum laid out on the tray. For instance, let’s look again at what made up the Rs 87,814 crore of the capital budget for FY’13. Of this, Rs 12,618 crore was for the recapitalisation of state-owned banks and Rs 4,005 crore was subscription to the IMF. Another Rs 10,000 crore went as loans to the Food Corporation of India to finance its purchases of food stock.

Rs 6,123 crore was paid for police modernisation. The little that was spent on genuine capital expenditure, as is understood in economics, is Rs 12,229 crore for transport and Rs 24,132 crore for supporting plan expenditure in the railways. Is it any surprise then that the investment multiplier for government is so poor?

So the sum is measly and is spent on trivia. The shortage of funds to finance capital expenditure emerges from the high committed expenditure of the government on interest, subsidies, wages, etc for its own employees. These, in turn, lead to a high fiscal deficit that will take time to erase.

There have been several articles written on whether the government would be wise to depend on consumption-led growth against an investment multiplier when it presents the general budget on February 28. There is no point in visiting that turf again. Given the shortage of funds for investment, the government has little option but to lay out measures to encourage private investment in FY’16.

One could label them as playing to the markets, but it would be wise for the pundits to realise the implications of the alternatives. To make investments in the economy happen and for those, in turn, to create jobs that are meaningful, these measures — such as the ordinances — are essential prerequisites. The one option often offered as a means to get away from this straitjacket is for public sector manufacturing companies to spend the money they now hold as reserves. This argument does not factor in a problem. A listed company cannot leapfrog over its board of directors to come up with an investment plan without reasoned scrutiny — witness, for example, how the public sector banks, despite a rate cut by the RBI, have not responded so far.

Since the room for government-led capital expenditure to finance growth will be limited, the trick to watch out for from the finance minister will be whether he just uses tax concessions as an incentive to spur private sector investments or whether he comes up with better thought-through alternatives

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