India needs big ticket reforms to revive the economy

The disappointing 5.7 per cent growth rate in Q1, lowered growth forecast for FY 2018, slowdown in number of start-ups, job losses, stressed assets in the banking sector, slowdown in investment rate, slowdown of exports and sudden rise of current account deficit — all this has given an opportunity to the Opposition to pounce on the BJP led NDA government.

In fact, the investment ratio reached 27 per cent, the lowest in the last decade. Similarly, trends in credit growth and Gross Non Performing Assets (NPAs) are lowest and highest in decades, giving the government and policymakers a lot to worry about. Finally, the government announced two big-ticket announcements, recapitalisation of the Public Sector Banks (PSUs) by Rs 2.11 lakh crore within two years and mega road construction projects worth of Rs 6.92 lakh crore by 2022. These twin steps are expected to stimulate the economy.

Credit

Availability of credit is important for a growing economy and more so when investment is slowing down. However, PSUs have been suffering from stressed assets amounting Rs 10 trillion and leaving them with a weak capital base for fresh lending. The high NPAs, which led to weak capital base in the banking sector, is also responsible for banks not to pass on the benefits of rate cuts to borrowers. Hence, the government announced Rs 2.11 lakh crore recapitalisation of PSUs through recapitalisation bonds, market borrowings and budgetary support.

The majority of resources would be mobilised through bonds (Rs 1.35 lakh crore) and market borrowings (`0.58 lakh crore). Though issuing bonds will cost to the government, the benefit is much more if it is well directed to boost credit, investment, and growth. This is a welcome step and would kick-start lending, help revive stalled projects and boost demand.

As chief economic adviser, Arvind Subramanian says recapitalisation must be incentive-based and put into best use by directing it to the banks where it would create maximum credit creation. At the same time, banks should work hard to recover loans by either using an appropriate mechanism such as bankruptcy and insolvency code or taking over defaulting companies.

There should be aggressive recovery from defaulters to avoid moral hazard problem in future and the fresh lending should be made in an efficient way to ensure the problem is not repeated. It is also better if the government ensures better credit availability to priority sector, affordable housing and SMEs so that there is quick turnaround in both demand and supply chains.

The second big announcement is the cabinet clearance of Rs 6.92 lakh crore to build 83,000km of roads in next five years including Bharatmala project which involves construction of 34,800km roads connecting economic corridors, feeder roads and interiors. This is timely as the two earlier major decisions of the government, demonetisation and GST, have disrupted the growth momentum, affected supply chain and given a big blow to the rural and informal economy.

Given the high fiscal multiplier of infrastructure spending, focus on infrastructure to boost economy would help revive slowing demand. Road infrastructure has significant forward and backward linkages and enhanced spending will boost many industries such as cement, iron and other construction-related industries, which are employment intensive but badly affected by demonetisation and GST.

The focus on the road sector is a welcome step, but the real question is the ability of the government to mobilise resources and deal with contentious issues like land accusation, environmental clearances and other regulatory issues. Given the fiscal resources available and the need to maintain fiscal discipline, the private sector’s participation is important. Therefore, it is time to seriously implement Kelker committee’s recommendations on Public Private Partnership (PPP) models.

Infrastructure

The government has taken a few right steps like the introduction of Public Utility Bills to resolve infrastructure construction related disputes, renegotiation of PPP contracts, rating infrastructure projects and promoting asset reconstruction company. However, some of the crucial recommendations of the Kelker committee’s recommendations such as dedicated institute for PPP, independent regulators, risk sharing, lending constraints, protection of private investment, etc, are crucial for private sector participation in the infrastructure sector.

There are a few other options the government can explore for infrastructure financing. First, creating an enabling policy framework to tap funds through external Official Development Assistance (ODA) from developed countries like Japan, multilateral development banks and international organisations.

In fact, the policy by the Modi government of allowing state governments to mobilise resources for infrastructure projects directly from bilateral agencies through official development assistance is a good move. Another good source of raising funds is through issuing offshore rupee-denominated bonds which are popularly known as masala bonds and without any currency risks.

Economy

China has raised trillions of dollars through this channel over last decade and India has also started offshore local-currency bonds in 2013 for domestic infrastructure financing. In fact Yes bank, HDFC, NTPC and few Non-Banking Financial Companies (NBFCs) have raised finances through the Masala bond route. Given the prospects of Indian economy and rupee’s appreciation, this route would attract foreign investors, particularly pension funds, sovereign wealth funds and other institutional investors.

For example, Japan’s pension fund is more than $1.3 trillion (Rs 84,72,000 crore) and the government can devise a right framework to attract pension funds to invest in India’s infrastructure sector. India can follow Japanese model of value capture to raise funds, that is, selling and leasing land around infrastructure projects, whose value immediately goes up, for developmental and commercial purposes.

Both recapitalisation and big infrastructure spending announcements are required to boost the economy towards the eight per cent growth rate. However, the government should work hard to recover loans and help revive some of the stalled projects, particularly in infrastructure sector.

(Courtesy of Mail Today.)

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