Reform era public investment

Written by Shashanka Bhide | Shashanka Bhide | Updated: Dec 31 2007, 03:36am hrs
India's public sector accounts for about 23% of GDP today, down from its share of a quarter in 2000-01. Even in its heyday of the 1980s, the share was not far above this level. Even in terms of jobs, its share in organised sector employment may not have declined significantly. However, this stability on the surface is not without changes in the structure. There has been a decline in the share of departmental enterprises, and a rise in the share of non-departmental enterprises. Its share in investment has declined, giving way to the private sector. The public sector may have shed some of its enterprises, but its presence in the economy was so wide that it is still a notable part of many thriving sectors of the post-reform economy. For all its inefficiency, it may have bet on the winners. Infrastructure, finance and petroleum are public sector dominated sectors. The only area of complete absence is in the offshore software and BPO markets. No one is complaining either. If public sector investments are likely to retain their size and momentum, should these be in sectors that supply public goods or in sectors of attractive profit potential

The post-reform period, therefore, may have only changed the structure of public sector spending. The uncertainty with respect to the right sectors to be in appears to have reduced. Infrastructure and finance are likely to be areas of operation for public sector enterprises. This focus may provide some stability to these sectors in terms of investment, although it may also restrain growth and efficiency. While the public-private partnership (PPP) model was conceived as a way to blend efficiency and equity, the leader in infrastructure investment remains the public sector.

However, this sequence of possibilities is not without challenges. The public sectors growth was under pressure largely because of macroeconomic constraints. The private sector was not a real option because of institutional constraints. Now both these constraints appear to be less important. The economy is booming, yielding more tax revenues to the government, and the private sector has expanded many times with access to global markets for technology and finance. Institutional mechanisms for regulation and ensuring competition have also emerged, though much too slowly. With these changes, the need for public sector presence in many of the economys sectors may have weakenedwith or without success in disinvestment programmes. What would then drive public sector investments Is it economic security, equity, or the taking of risks where the private sector is unwilling to go The persistence factor that makes it difficult for an institution to withdraw from an area of operation would mean that the public sector will retain its presence in such sectors as infrastructure.

The choice increasingly would be one of public service, rather than profit potential, for public enterprises and/or investments. It is not only the countrys economic infrastructure, comprising physical and soft infrastructure (research & development, besides health & education), that requires considerable investments over long periods of time. It may actually be more difficult to make efficient investments in soft infrastructure because so many things are likely to change from one place to another. But this is an area where public investments would be needed, despite the fact that they are not likely to be profitable. The level of such public investments would have to be constrained by macroeconomic factors, while the structure would have to be driven by longer term returns than what the private sector is likely to consider attractive. Investments in agriculture, health, education and development of backward regions should remain the focus of public investment. These sectors are unlikely to be the ones where there is a direct case of crowding out private investment, and if the fiscal balance is maintained, then this will not happen in broad financial terms either.

At a macroeconomic level, the public sectors growth has still retained some of its autonomous momentum, imparting stability to aggregate demand. It may have lost some of its importance, however, as new drivers of demand have emerged in the economy. For instance, FDI is emerging as a driver of economic activity. In fact, FDI speaks of the crowding in effect of public investment. There have always been strong positive links between public sector and private sector investment, given the public sectors dominance of infrastructure. The advantages are such that increasingly, FDI is also becoming an active component of investments in infrastructure. In the case of FDI, the crowding in effects may also be strong because of its need to find new complementary avenues for investment. But the numbers for FDI are still small in relation to total investments or even in relation to public sector investments. After all, public sector investments represent about 8% of GDP, whereas FDI accounts for about 1% of GDP.

The momentum of public investment is not likely to slow down, but there will be an increasing need to reassess where these investments are needed. It should always be long-term returns that attract public investments, rather than short-term gains.

Shashanka Bhide is senior research counsellor, NCAER. These are his personal views