More investment is key to economic growth in 2020; infra target seems too ambitious to be achievable

What are the prospects for the Indian economy in 2020? Given the sharp slow-down in the growth rates, the liquidation of the largest non-banking financial company which clogged up credit flows to major housing and other projects, the questions about the bulging NPAs of public sector banks, among many other episodes, had generated a sense of drift.

On top, the latest revelation about core sector performance which showed a continuing slide in production, over-shooting fiscal targets even by November last year, it could not honestly be said to be very happy right now.

But just as good times do not last for long, the gloom also dissipates. Maybe, the process has just about begun. At least two moves taken reinstates a sense of hope.

In a way, 2019 was a annus horribilis for Indian economy. Month after month, quarter after quarter we have been receiving bad news and data for the economy. Overall growth slid drastically to just about 5 per cent from 7.5 per cent a year back. But the sense of a fear that the economy was drifting began with the scares raised by the automobile companies reporting sharp drop in sales.

As if that was not enough, the government’s former economic adviser raised questions about the truthfulness of India’s economic data. As typical of such high functionaries, they raise alarm only after leaving service. As long as he was in the chair, however, he had not raised the data questions and kept producing papers on internal migration in India and the number of excess girl child, which even if interesting, were of little help.

Now the government’s move to create a high level body to look into the deficiencies of India’s data infrastructure under some of those very vocal critics of the system clearly drove the notion that the authorities were serious about setting things right and not just in conveying false impression.

Secondly, to begin with, on New Year Eve the government has presented a gift. The size of the gift is so humongous that if properly implemented this could change the face of the economy. Some $1.4 trillion worth of investment in infrastructure spread over the next five years upto 2025 somewhat resembles what the Chinese government had done in the aftermath of the 2008 global financial melt-down.

We have been talking big about infrastructure investment for a while. The announcement on infrastructure has two broad purposes. This talk of big investment gives a sense of confidence that the government is active and would keep pushing for a revival of the economy. This is important since a sense of the government not being in the control and not even in a position to really diagnose what needs to be done was gaining ground.

That was when the finance minister had peremptorily announced a deep cut in the corporate taxes, when what being talked about was lack of domestic demand. In retrospect, it appears to have been unnecessary and rather crimped on the government’s ability to undertake some pump-priming.

It is in the background of this reduced fiscal space that the large infrastructure investment plan should be assessed. The tentative funding plan provides that close to 40 per cent funding should come from the centre and the states, respectively, and the balance from the private sector. There lies the rub.

Funding for one-third of the projects have already been lined up, according to the government announcement. Funding for the two-thirds have to be organised. This is by no means easy since the state of finances of both centre and states are far from being comfortable. So the hope is on introducing reforms in the infrastructure sector, mainly in raising the service charges, viability gap funding through what has been suggested through credit enhancement institutions.

Realistically speaking, given their finances It is better to scale down the projected ambitions for central and state government investments in the infrastructure projects. It would be more appropriate to undertake those reforms and concessions which can attract large private sector funds into infrastructure sector.

It is critically important that the forthcoming budget should start working towards implementation of this overall strategy. The sharp drop in investments has been one of the precipitating causes of the current slow-down. But that should not start with fresh concessions in taxes for all concerned.

There is a strong demand now that with the concession already given in corporate taxes, it should be replicated in income tax rates for individuals as well. This is misleading since the number of individual income tax payers is not so large that such concessions could lead to a serious jump in overall demand. Concessions will further limit the centre’s ability to undertake infrastructure investments which have been formulated under the programme.

Rather a few steps could now be initiated. First, while previously we had the development finance institutions (like IDBI, IFCI and ICICI), two of these have now turned into commercial banks and the third in limbo. These institutions in themselves played the role of catalysts in generating long term project finance. Maybe, there might some justification for reviving them in some modified forms suitable for the times.

Secondly, the scope for higher foreign investment in the infrastructure sector could be facilitated by making their investments easier. Since the international capital markets are awash with liquidity which are looking for opportunities for deployment, these could be tapped. Long term contracts, security for their investments and modified agreements could be useful.

Things are not so bad. Already with farm prices recovering from their lows of last five years, rural demand should recover and with that should come a push for recovery. Deftly handled, the forthcoming budget could play a crucial role in starting a virtuous cycle.