Economic Survey Hits Badly: How To Revive India's Growth

The government’s Economic Survey 2014-15 released ahead of the budget, has hit the nail on the head to revive growth on the ground — revival of long-stalled projects and pumping in more public investments to breathe life back into the economy.

There are several critical points to be noted here.

One, by recommending revival of public investments in the short-term to act as an engine of growth in infrastructure sector, the survey has actually acknowledged the fact that the theory of private sector propelling growth wouldn’t work, at least, in the short term.
The private sector will, naturally, follow. But the initiative should be from the government.

This would mean that the government should opt for a realistic fiscal deficit target, giving itself room to channelise investments to the much-needed productive manufacturing activities in the economy. Public investment cannot be “a substitute for private investment but is required as a complement and to crowd it in.”

This is an important message to Jaitely, who will announce the main union budget tomorrow.

Two, the survey highlights the threat arising out of large chunk of stalled projects. The total stock of stalled projects in the country, Rs 8.8 lakh crore to be precise, currently constitutes about 7 percent of the country’s gross domestic product (GDP).

Most of the bad and restructured loans currently straining the balance sheets of banks has emerged from stalled infrastructure projects. Total gross non-performing assets (NPAs) of India’s listed banks currently stands at Rs 2.8 lakh crore, with over 90 percent on the books of public sector banks.

As Firstpost has noted before such rise in the bad loan levels has substantially added to the capital requirement of banks and the corresponding burden on the government, which is the majority owner in state-run banks.

Despite the talk of economic revival, the hard reality is that not much private investments has come to the economy that would have helped to revive stalled projects and give support to fresh projects. In the absence of any actual growth on the ground, even the government’s re-based GDP numbers have somewhat failed to enthuse investors.

In this backdrop, the government must fork out money to trigger the investment process. The economic survey rightly points out.

Three, creative solutions need to be devised to strengthen institutions relating to bankruptcy to ensure that exit options are available for failing companies. The survey suggests setting up of a high-powered Independent Renegotiation Committee.

This is important since currently banks are grappling with the recovery of thousands of crores of money given to large corporations. The recovery in many cases has been stuck for many years.

In the past, bankers have pointed out that huge delays in the asset recovery, often entangled in legal battles, leads to deterioration in the value of assets and results in huge losses for banks.

The government would do well if it acts in the direction offered by the economic survey.