This year, the government spent roughly Rs 20 trillion. In other words, 15% of India’s GDP. Of which, revenue items-like salaries, interest payments, subsidies—constituted 88%. These were basically cash transfers from the North Block. Only 12% of the Rs 20 trillion would have gone towards ‘capital’ expenditure. This part of the pie is naturally more productive since it promises the creation of durable infrastructure assets.
The capital spending worth 12% of Rs 20 trillion is around 1.6% of GDP. To give a flavour of how small that is: the central government spends double this amount or 3.3% of GDP on interest payments on borrowing every year. It is also beaten by what is spent paying salaries of central government employees, or allocation for major subsidies.
The Centre is not the only arm spending on capital goods. It accounts for an estimated 30%—the rest is spent by state governments. A back-of-the-envelope calculation based on this puts the combined capital spending at a still modest total of 5% of GDP.
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However, despite its size, this 5%has been engaging in a David versus Goliath battle against economic slowdown for the past few years. A decade ago, investment was at a record high of 42% of GDP. Five years ago, it had reduced to 38%. Currently, it is 32%, and falling. Projects under implementation have fallen from a heyday growth of almost 50% (yoy) to around 6%. Private investment is slumping. Public investment is desperately trying to hold the fort.
The precipitous fall in investment started around 2010-11 with high-profile corruption cases, exacerbated by policy uncertainty around taxation, land use and environmental permits. A massive pile-up of delayed project approvals, clearances and implementations added to the woes. Supply-side bottlenecks, especially on mining, power and manufacturing, further pronounced the problem. While a lot of commentators blamed the high interest rate regime at the time, a recent IMF study on the issue plays down its contribution to the slowdown.
All of these did little to improve business confidence. As investment started slowing down, banks who had lent out to corporates found themselves with paralysed balance sheets. Stressed assets account for a worrying 12% of banks’ advances. It is of little coincidence that December saw non-food credit growth slump to a multi-year low; while RBI released its Fiscal Stability Report, predicting that these will continue to rise till FY18. While the ‘Indradhanush’ programme is trying to balance governance reforms with a package of bank recapitalisation, there is still a lot to be done.
Without too many alternatives for financing available, the obvious corollary to this is that corporates have been forced to scale back investment plans. In a vicious cycle, this further drags business confidence.
To its credit, the previous administration recognised this pile-up and constituted a Project Monitoring Group (PMG) at the highest levels to track stalled projects, worth at least R1,000 crore, and remove bottlenecks to fast-track them. This institutional mechanism continues, and may be an indicator of how deep-rooted the investment slowdown is that 380 projects worth north of R18 trillion still remain stuck.
Government capital spending has been trying to essay the role of a knight in shining armour in the midst of all of this. Government investment amounts to 25% of the total. So, the hope is that this 25% invests enough to crowd-in the rest.
The rescue of investment needs a troika of increased government spending, restoration of banking sector health, and ease of doing business. While all of these are desirable, there are multiple pressures on the Budget. On one hand, there is need to bring down fiscal deficit and show commitment towards fiscal consolidation. On the other, interest payments and subsidy burden next year are likely to escalate. In fact, this is going to be the first time in a decade that government interest payments’ will be larger than overall fiscal deficit. Obligations on pay revisions and the need to give stimulus to the rural economy will also loom large on the Budget. While GST remains under discussion, the government may need to earmark as high as 1% of its total expenditure to account for compensation to states.
Capital spending might prove to be the proverbial sacrificial lamb. Maybe a compromise of increasing the budget on bank recapitalisation could be an indirect way of addressing investment slowdown. Either way, this remains an important issue. Overt compromise on this could very well compromise growth.
The author is deputy head of economics to a foreign mission based in New Delhi.
Views are personal