Column: Money coming out of Arun Jaitley’s ears

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Updated: February 24, 2015 11:29:09 AM

The finance minister can easily increase capex without junking the deficit targets, real problem elsewhere

Junk the deficit target. The economy needs investment and, with private sector balance sheets too stressed, the only way to get growth back is for the government to come up with some aggressive investment plans. It is more important to stimulate the economy than it is to stick to the deficit target—in any case, if the economy grows, it can tolerate a larger absolute fiscal deficit. The deficit only matters to the extent government borrowing reduces the amount available for the private sector, but the latter isn’t borrowing much anyway, as can be seen by the manner in which bond yields have fallen … Ever since the government has come in, and especially over the past few weeks, it got a lot of such advice, and from people the prime minister takes seriously such as Niti Aayog chief Arvind Panagariya.

There is, of course, no doubt that the economy cannot grow unless investments pick up, even though the CSO seems to think India has achieved a miracle with a sharp step up in growth without any commensurate increase in investment levels—as has been pointed out before, the latest GDP data are dodgy, so let’s forget about them. Between FY08, when India’s growth was the highest, and FY13, it was the investment collapse that caused the problem. And within this, it was India Inc’s investment that really collapsed. While overall investment levels fell from 38% of GDP to 35%, household investments rose from 10.8% of GDP to 14.8% while public sector investments fell from 8.9% to 8.1%, but the real collapse was in private corporate investments which fell from 17.3% of GDP to a mere 9.2%.


There are several problems with a narrative that seeks to supplant private corporate investment with public investment. For one, the difference is way too large to be bridged. Even according to the latest GDP numbers, public sector investment was 7.8% of GDP while private corporate investments are 11.4% of GDP in FY14. Two, higher government investments are one side of the story, the other is government savings. If savings are funded through larger deficits, that can drive up interest rates for others. Three, it is a mistake to confuse government capital spending with investment. In FY13, for instance, the Budget planned a capital expenditure of R2,04,816 crore—when the overall Budget expenditure got compressed by R80,000 crore, this got reduced to R1,66,858 crore—but the economic and functional classification of the Budget puts the capital formation by government at a much lower R77,974 crore. The overall capital formation due to the Budget—this includes the financial assistance given by the government to states and PSUs to create capital assets—however, was a higher R2,43,775 crore in FY13. In other words, the mix of spending is critical. Four, in the majority of cases, public investments tend to be less efficient than private sector ones.
But let’s leave that aside, and assume it is critical finance minister Arun Jaitley increases capital expenditure by the government in the short run. The point of this column is to argue that all of this can be done without compromising on the fiscal deficit targets. Indeed, while it looks difficult to believe this at a time when the government is facing a R1 lakh crore hole in tax collections, finance minister Arun Jaitley can actually have money coming out of his ears should he choose to exercise the option.

India’s most successful fund-raising from disinvestment—R24,329 crore has been raised so far this year—offers some pointers as to the road ahead. The market capitalisation (see graphic) of central government PSUs excluding banks is R13.8 lakh crore. If you assume the government does not want to actually privatise—this will raise the market cap of PSUs significantly—going down to 51% levels will free up R2.7 lakh crore. In other words, Jaitley can fund an aggressive capex plan from greater divestment over the next few years. These numbers don’t include banks since the government stake dilution in them will take place in the form of the banks raising fresh equity to fund their capital adequacy needs.
In addition, there is R15,000 crore that is to be got from selling the government’s residual stake in Hindustan Zinc and Balco, and another R65,103 crore that is to be got by selling the shares held by SUUTI in L&T, Axis Bank and ITC.

The money-raising doesn’t stop here. While adopting the recommendations of the High Level Committee on restructuring FCI will cut the food subsidy by R30,000 crore, the real money will come from selling off the huge stocks of wheat and rice that FCI has. Once cash transfers are made in place of the current ration shop system, FCI no longer needs to keep the kind of buffer stocks it has at the moment. More rational buffer stocking— the HLC recommends 10 million tonnes versus an average stock with FCI of 54 million tonnes today, of which only half will be kept in physical form—will also free up R1 lakh crore of funds for Jaitley.

And we haven’t even talked of the investment that can be kickstarted by using the large tracts of government land since there is no comprehensive estimate of this—most airports have been funded by giving developers large tracts of land to build for commercial use. Jaitley and prime minister Narendra Modi’s bigger problem, however, is that the current system of public investment has also broken down. While the National Highways Authority of India (NHAI) used to give out contracts for 6,381 km of highways in 2012, it gave out just 892 km in 2014. This is what the government needs to fix along with, for instance, getting the Railways to start investing more in capital stock.

While roads minister Nitin Gadkari has outlined his PPP-minus plans for the sector (, the good news here is that the DMICDC urbanisation plan is well on track, so if Jaitley wishes, he can allocate large funds for the project. Getting the defence ministry to clear more projects instead of refunding large unspent capex each year is another option, and from the looks of it, this is something that it on the cards.
The bigger issue, of course, would be to get the private sector to start investing again. But, as this column has argued before, government policies continue to be perverse in critical areas like oil and telecom where investors are ready to invest tens of billion dollars over the next few years. While the stealing of government files in the manner we just saw is a very serious crime, and the government did well to discover it, the way this is being equated with corporate lobbying—by senior ministers as well as a hyperventilating media—suggests not too much will be done about fixing the incentive structure anytime soon; certainly the stunning defeat in Delhi, and Kejriwal assuming the larger than life role he has right now, suggest the government will not hike gas prices in a hurry, never mind that this depresses private investments. And there is a possibility the government may dilute the land ordinance. That’s what Deepak Parekh’s angst was all about, and it is unfortunate that power and coal minister Piyush Goyal chose to dismiss it as some kind of personal problem India’s senior-most banker was unable to grapple with.

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