The idea that the government should lead investment revival by spending from its purse seems to be gaining ground quickly. The thought was first expressed by Chief Economic Adviser Arvind Subramanian a month ago while releasing the government’s mid-year review of the economy. Mr. Subramanian was of the opinion that public investment may have to play a greater role to complement and “crowd-in” private investment. Of course, this had to be done within the constraints of the fiscal situation. In an interaction with industrialists in Chennai on Monday, Finance Minister Arun Jaitley endorsed this view, saying that the government would take some “special steps” to increase public investment while pointing out that it would be a challenge to do so within the constraint of the fiscal deficit. Mr. Jaitley expressed the government’s predicament well. It is a fact that private investment in infrastructure is in a comatose state thanks to over-leveraged balance sheets and excess capacities that may take a long time to be absorbed. The banking system is groaning under the collective weight of the overdues of private borrowers, and banks are clearly unwilling to lend for new projects.
Of course, some companies have already started to repair their balance sheets by shedding assets through mergers and acquisitions and using the proceeds to settle their dues with banks. Clearly, though the de-leveraging process has begun, it will be a while before the private sector cleans up its act and goes for fresh investment. The onus to stimulate a revival is, therefore, clearly on the government now. The Centre has been appropriating a part of the bounty from falling global oil prices in the form of higher excise duties, and the Finance Minister is on record as saying that this money will go directly towards building new roads and highways and not into the Consolidated Fund of India. This will give an impetus to the highways expansion programme that has been struggling for want of adequate interest from private developers. But then, the scale and quantum of public investment required is much bigger, and this is where the government will run into the fiscal wall. With 99 per cent of the projected deficit for this year already accounted for in the first eight months, headroom for additional spending is non-existent this fiscal, even if one were to account for bountiful proceeds from the spectrum auction that is due next month. The focus is therefore on the coming fiscal, and the Budget will provide an insight into the government’s plans on this front. Clearly, some tightrope walking will be required as the Centre seeks to increase spending on infrastructure projects to compensate for private investment.
