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We see the new government at the Centre initiating several reforms. Together with the experts, the Government of India also believe that this has revived the investor sentiment. But a real investment flow is yet to pick-up, especially from the private sector. The cause for such a situation has been identified as the “balance sheet syndrome with Indian characteristics”. The Economic Survey 2014–15 has analysed this situation in greater details.
In such a scenario, together with other measures, the most important action which has been suggested is “boosting the public investment”. Merit of such an action has been emphasised by the Mid Year Economic Analysis 2014–15, too. The document says that reviving ‘targeted public investment’ will work as an engine of growth in short-term and will lead to investment flows coming in from the private sector. It has not suggested public investment as a substitute for private investment but as a means to complement and kick start investment flows from the latter.
Several recent studies, from India and abroad, have been quoted by the Economic Survey 2014–15 to suggest an increase in the public investment— in a targeted way. Here, ‘targeted’ public investment means, government investment in the sector which can generate the largest ‘spillover effects’ to the economy. In present time, the Railways has that level of spillover potential. The Survey agrres with the famous observation of W. W. Rostow – ‘the introduction of the railways has been historically the most powerful single initiator of take-offs’67. The rational for such a policy action has been emphasised by referring to the follwoing documents and studies:
(i) It has been found that there has been a ‘link’ between public and private
investment in past which caused either rise or fall in the growth rate. The Central Statistics Office (CSO) data indicate that a ‘boom’ in private corporate investment in the high growth phase of 2004–08 was accompanied by an increase in public investment by about 1.5 per cent.
Similarily, a decline in public investment by more than 1 percentage point between 2008–13, is accompanied by a general decline in private corporate investment by more than 8 percentage points
(except an increase during 2009–10 and 2010–11).
(ii) The World Economic Outlook-2014 (an IMF report)68 noted that increases in public infrastructure investment, if efficiently implemented, affects the economy in two ways:
(a) In the short run it boosts aggregate demand and crowds in (increases) private investment due to the complementary nature of infrastructure services.
(b) In the long run, a supply side effect also kicks in as the infrastructure built feeds into the productive capacity of the economy (infrastructure being the lifeline of an economy that bringing positive effects to all sectors).
The studies of the IMF confirm that increase in public investment can have positive effects on output. The medium-term public investment multiplier for developing economies is estimated to be between 0.5 and 0.9, however, the magnitudes depend on the efficiency of implementation.
(iii) In order of boosting public investment there are the two challenges in this regard are—
(a) Mobilisation of the financial resources to enhance public investment, and
(b) Implementation capacity.
To the extent implementation capacity is concerned, a sector with the maximum positive ‘spillovers’ together with proven capacity for investing quickly and efficiently, can serve the purpose. Two such sectors are: rural roads and railways. Enhancing road connectivity can have a huge positive spillover on the economy—this has been shown by
recent studies69—the examples in case are the National Highways Development Project and the PM Gram Sadak Yojana of early 2000s. These public investment moves encouraged rurl employment and earnings.
The Survey believes that the present government should encourage public investment in the hetherto neglected railways sector—it has the potential to have similar effects on the economy as the road sector could do in past. This has the potential to crowd in greater private investment and without jeopardising India’s public debt dynamics.
(iv) Public investment has direct positive bearings on the growth prospects, as per the empirical studies. India’s productivity surge around 1980 was due to boost in productivity led by enhanced public investments in the infrastructure sector (in contrast to the demand creating effects).70 The study analyses the effects on overall growth using a framework71 where government infrastructure services are an input into private production. The results of the study indicate that allowing for the appropriate lag (of around five years) between public infrastructure spending and growth, the former can explain around 1.5-2.9 percent of overall growth.
(v) A study72 by the RBI reports the long run multiplier (of capital outlays on GDP) to be 2.4. The study also confirms that the effect of revenue expenditure on GDP, though high, fades out after the first year, suggesting gains from reprioritizing expenditures.
Thus, the Survey has emphasised a big role of enhancing public investment in the railways sector. It could be started as only public investment. But soon, the impetus given by the government will generate enough avenues and new possibilities that the sector will start attracting enough investment flows from the privates sector. Once such an effect is visible then there are several possible alternatives to promote investment—the PPP to dedicated private inevstments. Railways being a lead infrastructure sector it will bring in multi- dimensional positive spillovers in the economy. Linking people and places has great potential in creating great many numbers of openings in the economy.