Get ready for massive government borrowings

Due to poor recent experiences with the private sector, the government is pushing for much higher public investment, especially in infrastructure – at the cost of fiscal prudence


In the Mid-Year Economic Analysis (MYEA) for 2014-15, the Indian government has called a major policy change -- more public investment, especially in infrastructure segment. Tucked away on page 18 and 21, it says, "To revive growth, public investment may have to play a greater role … Consideration should be given to pursuing counter-structural fiscal policy as a way of reviving growth, and to finding the fiscal space to finance such investment…"

However, the question, especially looking at past experience, is whether public investment will necessarily lead to efficient outcomes. In addition, what will be the implication on fiscal deficit and interest rates?  This concern is on the backburner for now.

The government is turning impatient about poor growth and wants to take the reins of investment-led growth in its hands. According to the Mid-Year Review, the case in India for public investment going forward is threefold. "First, there may well be projects like roads, public irrigation, and basic connectivity, that the private sector might be hesitant to embrace. Second, the lesson from the Public Private Partnership experience is that given India's weak institutions there are serious costs to requiring the private sector taking on project implementation risks: delays in land acquisition and environmental clearances, and variability of input supplies, all of which have led to stalled projects.


These are more effectively handled by the public sector. Third, the pressing constraint on manufacturing is infrastructure. Power supply and connectivity are key inputs that determine the competitiveness of manufacturing."

How will this ambitious intervention be financed? The report notes "India has a fiscal flow problem but not a stock problem because the ratio of Government debt to GDP has declined substantially over the last decade due to a combination of high growth and high inflation," the report said. The report also notes, “that the debt dynamics will continue to work in India's favour as long as growth remains around 6% and the primary deficit remains in the current range of 1% of GDP. A case not just for counter-cyclical but counter-structural fiscal policy, motivated by reviving medium-term investment and growth, may need to be actively considered.”

This means the government thinks it has a lot of room to borrow. In overall terms, what the government in effect in the report is saying that, India desperately needs investment in infrastructure. The government will step in to boost it and it does not care much about slippage in fiscal deficit target in the process.

The push by public sector comes in the wake of disappointment of the last few years following “over-exuberant investment, especially in the infrastructure and in the form of PPPs”. There are stalled projects to the tune of Rs18 lakh crore (or about 13% of GDP) of which an estimated 60% are in infrastructure. In turn, this reflects low and declining corporate profitability as more than one-third firms have an interest coverage ratio of less than one, as borrowing is used to cover interest payments. Over-indebtedness in the corporate sector with median debt-equity ratios at 70% is amongst the highest in the world. The ripples from the corporate sector have extended to the banking sector where restructured assets are estimated at about 11-12% of total assets. Displaying risk aversion, the banking sector is increasingly unable and unwilling to lend to the real sector, it added.

Laying the ground for public expenditure to get out of this quagmire, the report argues that attracting new private investment, especially in infrastructure, in this climate, will be tough. "The PPP model has been less than successful. The key underlying problem of allocating the burden from the past, the stock problem that afflicts corporate and banks' balance sheets needs to be resolved sooner rather than later. The uncertainty and appetite for repeating this experience is open to question," the report said.

The other reason to argue for public expenditure is that while “private corporate investment surged in the boom phase, public investment too grew by about 3 percentage points. In addition, just as corporate investment declined by 8 percentage points during 2007-08 to 2013-14, so too has public investment by about 1.5 percentage points.”

If the thought process contained in the report is implemented, the bottomline would be this- The government and various public sector arms will enter the debt market to borrow massively. This demand for money will keep actual interest rates high, even if the Reserve Bank of India (RBI) cuts interest rates. Even that would be acceptable but what about the quality and deadline of public projects? The report notes, "To be sure, a greater role for the public sector will risk foregoing the efficiency gains from private sector participation. A balance may need to be struck with targeted public investments, carefully identified and closely monitored, by public institutions with a modicum of proven capacity for efficiency, and confined to sectors with the greatest positive spill-overs for the rest of the economy. These may then be able to crowd in greater private investment".  

Given how poorly supervised public investments are, this is a pipedream. All we may get out of this adventure is fiscal slippage.



K M Rao

2 years ago

PPPs have miserably failed on account of various reasons. The infrastructure companies have completely lost the trust of investors. The best course according to me is that the Govt. should give tax free bonds say at 10% and borrow from the market. The public will be more than willing to invest in these bonds rather than the IPOs and Mutual funds. Remember in 1990s Konkan Railway issued tax free bonds and the scheme was fairly successful. Professionals shall be brought in for execution of all important projects not the generalists.

Nifty, Sensex precariously poised: Weekly closing report

A weekly close below 8,140 will signify deeper correction


The S&P BSE Sensex closed the week that ended on 26th December at 27,242 (down 130 points or 0.48%), while the NSE's CNX Nifty ended at 8,201 (down 25 point or0.30%). From here a weekly close below 8,140 will signify deeper correction. Previous week we had mentioned that Nifty will head higher subject to dips if it doesn’t close below 8,080.
On Monday the Nifty headed higher. Three days of consecutive gains wiped off almost all the losses suffered during the five consecutive session ending 17 December 2014. Nifty closed at 8,324 (up 99 points or 1.20%). The government introduced the Constitution Amendment Bill on Goods and Services Tax (GST) in Lok Sabha. GST will simplify and harmonise the indirect tax regime in India.
On Tuesday Nifty closed lower contrary to our anticipation. It closed at 8,267 (down 57 points or 0.68%). The market was awaiting the outcome of the assembly election results held at Jharkhand and Jammu & Kashmir.
On Wednesday, the day of derivatives expiry, Nifty witnessed a sharp downward move, closing at its lowest in the past four trading session (including Wednesday). Nifty closed at 8,174 (down 93 points or 1.12%). Main highlight of the day was the Union Cabinet approving promulgation of the ordinance on the insurance bill, re-promulgation of the coal ordinance and allowing up to 100% FDI in medical devices in the pharmaceutical sector under the automatic route.
Stock markets remained closed on Thursday on account of Christmas. Weakness on the Nifty continued on Friday as well. However some buying in the last few minutes of trading pulled the benchmark back in the green. Nifty closed at 8,201(up 27 points or 0.33%).
Out of the 27 main sectors tracked by Moneylife, top five and the bottom five sectors for this week were:

 ML Top sector


ML Worst sector




Non-Ferrous Metals


Telecom Services








Farm & Farm Inputs


Software & IT Services


Auto Components






Nifty, Sensex still on a downtrend – Friday closing report

Nifty will come out of its downtrend at least temporarily, if it closes above 8,213 on Monday


After a day off on the stock exchange on account of Christmas, the benchmark opened higher today and hit the day’s high. However, immediately thereafter, the indices plunged lower and hit the day’s low. This was followed by the indices moving in a range. The benchmarks regained a little strength in the last half hour of trading and closed marginally higher. In Wednesday’s closing report we mentioned that Nifty has some support at 8,120 but the overall trend is weak.
The S&P BSE Sensex opened at 27,215 while the S&P CNX Nifty opened at 8,205. The indices hit a high of 27,371 and 8,235 before moving lower to hit a low of 27,091 and 8,148. Sensex closed at 27,242(up 33 points or 0.12%), while Nifty closed at 8,201 (up 27 points or 0.33%). NSE recorded a lower volume of 55.63 crore shares. India VIX fell 2.82% to close at 14.6450.
PSU banks were in focus today. Prime Minister Narendra Modi plans to hold discussions with chiefs of public sector banks on January 3 to work out an action plan for major reforms in the banking sector. The meeting comes amid the piling up of distressed assets with public sector banks (PSBs) even as they are under pressure to step up lending to core sector projects. Union Bank of India (5.65%), Syndicate Bank (4.93%), Corporation Bank (4.68%), Andhra Bank (4.46%), Allahabad Bank (4.19%), Indian Overseas Bank (4.16%) and UCO Bank (4.03%) were among the top 11 gainers in ‘A’ group on the BSE.
The RBI has on Wednesday notified that further purchases of shares of Gujarat State Fertilizers & Chemicals would be allowed only after obtaining prior approval of the RBI as foreign shareholding through foreign institutional investors (FIIs)/registered foreign portfolios investors (RFPIs) in the company has reached the trigger limit. The stock (3.87%) was among the top two losers in ‘A’ group on the BSE.
HDFC (1.18%) was the top gainer in Sensex 30 pack. Maruti Suzuki (1.31%) was the top loser in Sensex 30 stock. The company foresees to register it’s highest ever sales in a calendar year in 2014 at about 11.48 lakh units.
On Wednesday US indices closed flat. Asian indices which were trading today closed in the green. Shanghai Composite (2.77%) was the top gainer.
Japan's exports of cars, trucks and buses declined 11.5% in November for the fourth consecutive month, the Japan Automobile Manufacturers Association said Friday.
Singapore's manufacturing output fell 2.8% on year in November, according to preliminary figures released by the government on Friday, compared with the revised 0.2% contraction in October. Preliminary October data released last month had shown a 0.2% on year rise.


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