The mid-term review of economy by the finance ministry can be taken as an authentic assessment of the economy by the government. It evaluates the target and performance as indicated in the interim Budget. It has been rightly argued that sharp fall in commodity prices (especially crude oil and mining resources) and declining rate of inflation (along with agricultural products) in the country has led to an over estimation of revenue (especially indirect and service tax), which has been calculated as about 0.84% of GDP.
There is, however, little mention that poor manufacturing and industrial growth has largely contributed to fall in revenue. Recent developments have proved that reform measures (Insurance Bill, MMDR Bill, GST) would not have an easy passage and the government has rightly chosen the Ordinance route. The acknowledgment that stalled projects worth of R18 lakh crore, which is around 13% of GDP and poses a serious challenge to corporate profitability, is what explains the poor rate of GDP growth as lack of private investment has led to a downward trend of Gross Fixed Capital Investment. On the other hand, unfinished capital projects enhance capital-output ratio that brings down the GDP rate.
The banks are unwilling to provide loans to private sector which is burdened with debts. The discussion stops here and there is no mention that lowering of interest rate could have partially solved the liquidity problem and the demand drying up of consumer durables. The document may, therefore, be seen as a veiled attempt to justify the hawkish monetary policy of RBI.
The document admits the failure of PPP model in the absence of adequate policy changes to attract private investment. It then goes on to argue for higher doses of public investment. Quite contrary to widely held belief that PPP mode is only successful in roadways, it is suggested that public investment is the harbinger of private investment and in three sectors, namely, roads, irrigation and basic connectivity, government investment is essential as these have externalities which do not attract private investment.
It seems the document strongly votes for Keynesian policy of larger doses of public investment in public goods and this sounds very similar to the stimulus measures initiated by the US as a part of Quantitative Easing. Our 12th plan document had indicated that out of $1 trillion investment required by the infrastructure sector, around 50% is to emanate from the private sector. If road sector where private investment was predominant is now recommended suitable for public investment, the question remains about the fund sources that would finance this investment. Are we then heading for a larger dose of fiscal deficit?
However, the chapter on industry is inadequate, to say the least. There is nothing new to conclude that capital goods and manufacturing move together and manufacturing can grow in tandem with growth in fixed capital formation. The close correlation between trade, storage, transport and communication sector with manufacturing and construction sectors is well established. The causal link is based on the fact that production of transport and communication equipment is included under manufacturing and the deliverables form part of construction sector.
The thrust of the new government in promoting the ‘Make in India’ goods, equipment and services runs contrary to the significant import growth the country is witnessing and in some of the critical sectors like steel, the abundance of imports is posing a serious challenge to the capacity augmentation endeavours by the major steel producers. This cannot be the right policy for a developing country like ours.
The author is DG, Institute of Steel Growth and Development. The views expressed are personal
