Given the state of private investment and the balance sheets of states, central capex critical for sustainable GDP growth
Let us not delude ourselves. A recovery to where we were before the pandemic isn’t good enough given we were growing at barely above 3%. If the economy is to grow meaningfully in the next few years, we need to deal with the structural problems. And, while the reforms will roll in right now, in the immediate aftermath of the collapse, we need to do two things: Inject a chunky dose of investment and revive real estate by completing stalled projects and offering sops for not just affordable but mid-income housing. The investment will need to come from the government and government-related entities like the NHAI and so on. For reasons well known—lack of equity capital and the inability to leverage—the private sector isn’t going to be able to do the heavy lifting, or any lifting at all; not for several years. But, it isn’t just their finances that is the problem, it is the bigger challenge of investing in basic infrastructure being fraught with policy and pricing risks, of the kind seen in both the power and the telecom sector. Corporations, therefore, are more likely to put their money to work in sectors where they hope—and pray—there will be relatively less government interference and bias. Gross capital formation by private (non-financial) corporations actually fell from Rs 18 lakh crore in FY16 to Rs 17.6 lakh crore in FY17 before recovering subsequently to Rs 18.7 lakh crore in FY18 and Rs 22.2 lakh crore in FY19.
But, at an aggregate level, gross fixed capital formation as a share of GDP has been sub-30% for five quarters; since Q2FY15—when this government came to power—it has never gone anywhere near the peak of 35.6% seen in Q2FY12. It is the states that typically do much of the capex, but given most of them are quite impoverished and over-leveraged, it is the Centre that needs to step up. Given where the economy is today, as also the state of government finances, targets of Rs 100 lakh crore of infrastructure over the next five years appear audacious. Nonetheless, we need to make a start, and that can begin with some speedy disinvestments and strategic sales—Air India, BPCL and Life Insurance Corporation, and many more that have been shortlisted. The pace of stake sales and strategic sales, for whatever reason, has been disappointing. Few businesses are really strategic, so there should be no reason to retain even 26% except in a handful of companies. If there is a concern, let the companies be widely held by institutional investors, but ideally, most businesses should be sold to private companies.
With global liquidity at record amounts—G3 central banks of the US, Germany and Japan, alone have expanded their balance sheets by $7 trillion this year so far—and Foreign Portfolio Investors having invested some $16 billion in Indian stocks, the government should ideally have cashed in on the rally in the markets. But, central banks are expected to remain accommodative, and emerging markets are expected to continue to attract portfolio flows. And, as the global economy recovers, MNCs too will resume expansion of their businesses; this then is a good time to speed up the sale of PSUs.
At one point, the government could have made about Rs 5 lakh crore if it had sold its entire holding in non-strategic PSUs and up to 51% in strategic PSUs. Since then, values have eroded; but if the markets hold, many of the enterprises can fetch a good price. The recent sale of Lakshmi Vilas Bank (LVB) to DBS is an example of how M&A can work well. To be sure, LVB was a private sector bank and, therefore, it was easier for RBI to arrange the merger with DBS. Selling a state-owned entity is an altogether different proposition. But, it must fully privatise some of the larger central PSUs over a period of time to be able to raise resources to meet not just the capital expenditure but also burgeoning revenue expenditure; disinvestments in 2020-21 so far have yielded Rs 6,500 crore, which is inexplicable.
In recent years, entities like NHAI have been relying on market borrowings to support their businesses. Given individuals are looking for a real return on their savings—right now, they are negative—this is a good time to tap into their long-term savings; with inflation expected to stay elevated, interest rates are bottoming out. Some of this needs to be put to work in the real estate sector. While the fund to facilitate last-mile funding has sanctioned Rs 12,079 crore to help complete 123 stuck housing projects, the approvals, as of October 5, stood at Rs 4,197 crore for 33 projects. To be sure, the pandemic slowed disbursements, but this scheme now needs to be scaled up quickly to at least Rs 25,000 crore, if needed, by diluting the norms. Some 1,500 projects remain stalled, with 4.5 lakh housing units to be delivered. Even if half of these units are completed, it will give the economy a boost. Tax sops for first-time buyers, at a time when asset prices are tipped to stay low or even fall, would drive up sales.