The impetus which can spur the economy towards real and sustainable growth has to be a mammoth injection into infrastructure projects, in line with the ‘Keynesian theory’
After a considerable wait, the prime minister finally announced a ‘stimulus package’ of Rs 20 lakh crore, i.e., 10% of India’s GDP, on May 12. The finance minister, in five tranches, announced the details of the package, subsequently amounting to Rs 20.97 lakh crore, thereby exceeding the target set by the PM.
It remains somewhat unclear as to what part of this package is ‘fiscal’, i.e., which would increase the fiscal deficit. Estimates from experts, as reported in a leading daily, range from 0.75% to 1.35% of the GDP.
Depending on whether you are a strong supporter of PM Modi or a bitter critic, there are two possible interpretations: One (for Modi supporters) is that this package is transformational (as it matches US package in terms of % of GDP), timely, covers almost all sections (if not all) of the society, and, besides relief, also encompasses major reforms covering four pillars of land, liquidity, labour and laws. In addition, the finance minister has displayed brilliance that is globally unparalleled in restricting the fiscal deficit increase to a small fraction of the overall package of a mammoth 10% of GDP.
The other one (for Modi critics) is that this is mere eyewash as it does not provide relief but only liquidity (mainly on the shoulders of banks). As opposition leaders have said, the government should not act like a ‘sahukar’ (money lender) in this hour of crisis, and instead, provide direct relief to masses who are facing unprecedented crisis and hardship. So, this is a mere measure to hoodwink the real issue, and yet another step in the series of ‘rhetorics’ or ‘jumlabaazi’.
To those who are neutral, the whole announcement is too complex involving RBI, banks, PFC, Nabard, state governments, etc, where it is not clear as to who gets the money and how—loans or grants, and if loans, the terms and time involved therein for the recipients to actually receive such loans. Reaction from capital markets has, at best, been neutral.
However, the purpose of this article is not to debate as to which view is correct. The purpose of this is to remind the readers that the stimulus is at best a temporary measure to lift the economy that is sagging as a result of Covid, by the bootstraps. The real impetus which can spur the economy towards real and sustainable growth has to be a mammoth injection into infrastructure projects in line with the ‘Keynesian theory’, propounded by John Maynard Keynes(whom, like many other students of economics, I consider as the greatest economist ever). It is crystal clear that without this dose, our objective of becoming a $5-trillion economy by 2025 will merely remain a dream and wishful thinking.
In this regard, it is important to note that the finance minister, in her press conference on December 31, 2019, had already announced that government would enable/ensure Rs 102 lakh crore in infrastructure projects over the next five years. This was pursuant to the announcement of Rs 100 lakh crore of infrastructure projects by the prime minister in his Independence Day speech of 2019.
The finance minister also announced that a task force had identified projects in sectors such as power, railways, urban development, irrigation, mobility, education, health, water and roads with respect to Rs 102 lakh crore investment, and that such investments would help India become a $5-trillion-economy by 2025.
It is quite clear that the magic dose for this sustainable GDP growth is the implementation of Rs 102 lakh crore ($1.450 tn) investment in infrastructure in next few years as already approved by the government. Needless to say, such investment in infrastructure is bound to have a ripple effect on all basic industrial sectors like steel, cement, aluminium, glass, paints, etc. The projects undertaken will create large scale jobs—particularly in rural areas as many of these projects would be either in rural areas or would require labour from rural areas for enhanced production of material required for these projects. As we all know, the additional employment and disposable income in the hands of more people will spur demand in every sector, thereby starting the much needed economic and industrial momentum.
Unfortunately, since a year has already gone by, in the next four years, we need to have projects worth Rs 25 lakh crore per year implemented, i.e., approx $335 billion per year and $1.35 trillion in total.
Quite clearly, the task at hand is seemingly unachievable and impossible if the government has to undertake these projects, given the severe constraints of funding with government and the status of fiscal deficit even without these investments. As a corollary, these projects will primarily have to be undertaken by the private sector. Fortunately, as part of the stimulus package, the government has allowed private investment now in virtually every industry with liberal FDI limits (including the much needed 74 % in defence production). It is unfortunate that in the noise about the package, this major reform went almost unnoticed.
However, I feel that the reality is that while the government cannot fund these projects, these cannot also be done without a strong financial, regulatory and legal cover provided by the government. I have the following suggestions to make to achieve these objectives:
Have a maximum debt: equity ratio of 3:1. This would mean equity infusion of approx `25 lakh crore ($335 bn) over the next four years, i.e., approximately $85bn each year. Debt of Rs 75 lakh crore (approx $1trn) over four years, i.e., $250bn per year. These would need to be funded by a combination of local debt and foreign debt including from multilateral agencies like IMF and IDB, Loans from External Commercial Agencies (ECAs) in respect of imported equipment, long-term debt from pension funds and sovereign wealth funds and global bond markets.
Preference be given to suppliers who are ready to put up manufacturing facilities in India—in line with defence procurement. Each project to have a clear economic business model, with the government guaranteeing non-interference, and any adversarial directive for revenue of those projects—e.g. limiting the tariffs artificially for, say, water (linking of rivers and providing water could be a major project).
The government must encourage foreign investors, particularly sovereign wealth funds of other countries to invest in equity and debt for these projects by guaranteeing certain actions. First, there should be a single-window clearance at the Centre. States will need to agree to such a single window, failing which they may have to forego such projects. The single window authority must have the power to relax rules if required, e.g., under FEMA, ECB, ECA, overall foreign exchange borrowing limits, etc.
Second, the Centre must guarantee clearances in a time-bound manner, failing which it must compensate for loss as well as penalty thereon. Third, open up FDI fully, except in rare negative list industries. This seems to have been already done in the recent package. Fourth, provide a general guarantee that government will only change rules to provide relief, and not bring any change which may adversely affect the economic outcome for such projects. Fifth, there has to be a guarantee that should any Court pass an order which adversely affects the viability of the project, the government shall ensure corrective administrative or legislative measures to restore original status/commitments.
Most important, give an option to investors that government will guarantee payments of debt, free of charge in lieu of the investors giving x% of the free equity (say 5%) to the government in those projects. As these companies get listed (for which there should be a mandatory requirement to list on achieving certain milestones), the government could divest their stake and reduce its debt. The government guarantee should be valid until the project achieves ‘sustainable profitability and cash flow’ based on pre-agreed criteria to ensure steady debt servicing.
The above steps could go a long way in having a practical chance of achieving the ambitious plan of over Rs 100 lakh crore in investments promised by the PM. Most important, the guarantees given by the government will not be counted towards the calculation of fiscal deficit, while ensuring massive lift in GDP. As a result, the fiscal deficit as a percentage of GDP could significantly come down over the next four years progressively along with the creation of millions of new jobs.
Vice-Chairman, Bharti Enterprises. Views are personal