{"id":3244,"date":"2015-01-29T10:57:07","date_gmt":"2015-01-29T05:27:07","guid":{"rendered":"https:\/\/teekhapan.wordpress.com\/?p=3244"},"modified":"2015-01-29T10:57:07","modified_gmt":"2015-01-29T05:27:07","slug":"the-govt-needs-to-think-out-of-the-box-to-finance-public-investment","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2015\/01\/29\/the-govt-needs-to-think-out-of-the-box-to-finance-public-investment\/","title":{"rendered":"The govt needs to think out of the box to finance public investment"},"content":{"rendered":"

\"Fostering<\/a>Vivek Kaul <\/span><\/span><\/span><\/p>\n

There is a great belief among economists in the Western world that if emerging market nations increase investments in their countries, global economic growth can be revived. Larry Summers, a former US treasury secretary and a Harvard university economist wrote in an October 2014 <\/span><\/span><\/span>column in the Financial Times <\/span><\/span><\/span><\/span><\/span><\/a>that \u201cthe case for investment applies almost everywhere\u201d.
\nAnd given that private investment is slowing down, the government needs to increase public investment seems to be the prevailing view. This becomes even more important with the International Monetary Fund recently deciding to<\/span><\/span><\/span> revise global growth downward by 0.3%<\/span><\/span><\/span><\/span><\/span><\/a> in 2015 and 2016 to 3.5% and 3.7% respectively.
\nThe Indian government seems to be thinking of giving a push to public investment. The finance minister Arun Jaitely <\/span><\/span><\/span>said so a few days back<\/span><\/span><\/span><\/span><\/span><\/a>: \u201cI think we have to take some special steps as far as public investments is concerned.\u201d <\/span><\/span><\/span>In yesterday’s column I had argued<\/span><\/span><\/span><\/span><\/span><\/a> that the government needs to be careful about how it goes about financing the public investment programme that it may unleash in the next budget.
\nThe recent evidence in favour of a public investment programme is not very strong. Many emerging market countries tried increasing public spending in the aftermath of the financial crisis in the hope of creating economic growth, only to see it not work and lead to other major problems.
\nAs Ruchir Sharma author of <\/span><\/span><\/span>Breakout Nations <\/i><\/span><\/span><\/span>explained in a recent column in the Wall Street Journal<\/span><\/span><\/span><\/span><\/span><\/a>: \u201cBefore anyone rushes to spend, however, it is worth noting that the big emerging nations, including China, Russia and Brazil just tried a full-throttle experiment in stimulus spending, and it failed. The average growth rate for emerging economies excluding China has fallen to 2.5% today, from more than 7 % at the height of the spending campaign. That is the lowest growth rate in four decades, outside of a global recession. For leaders in these countries, stimulus is now a bad word.\u201d The Chinese growth also recently touched a 24 year low of 7.4%.
\nSo what went wrong? \u201cEmerging nations borrowed from the future to produce that flash of growth in 2010, and now they face the bills. Their government budgets have fallen into the red, from an aggregate surplus equal to 1.5% of GDP in 2007 to a deficit equal to 2% of GDP in 2014. To pay for this deficit spending, public debt has risen significantly, throwing the books out of balance,\u201d wrote Sharma. This is a point that Jaitley in particular and the Indian government in general should keep in mind, before they go on to take \u201cspecial steps as far as public investments is concerned\u201d.
\nThe rating agencies and the foreign investors are watching India closely after Jaitley said in his maiden budget speech that \u201cmy roadmap for fiscal consolidation is a fiscal deficit of 3.6 per cent for 2015-16 and 3 per cent for 2016-17.\u201d In the current financial year the government is aiming for a fiscal deficit of 4.1% of the GDP.
\nGiven this, it is important that the government has a clear idea of how it will go about financing the \u201cspecial steps\u201d for public investment. One way out is to resort to asset sales. Asset sales does not just refer to the government disinvesting its shares in public sector units as well as other companies.
\nTake the case of Indian Railways, which owns huge tracts of land all around the country. Some of this land can be sold to generate revenue for revitalization of the Railways. Given the shortage of land in cities, this move can garner a good amount of revenue. Also, it is important to carry out some sort of an exercise which tells the government clearly how much land does the Railways actually own.
\nOver and above this, the Railways can also look at raising money by branding trains and stations. This is a move that has been tried in the past at least with Mumbai local trains. Also, stations on the Rapid Metro route in Gurgaon are sponsored by corporates. This can be one way of raising some \u201ceasy money\u201d for the revitalization of Indian Railways. Also, it is worth pointing out that Railways is not the only department sitting on a huge amount of land.
\nIf the government puts its bureaucrats and advisers to some use, such out of the box ideas will come out. Further, there is some low hanging fruit that the government can easily cash in on. One such low hanging fruit is the shares that the government owns through Specified Undertaking of Unit Trust of India (SUUTI) in ITC and Larsen and Toubro which as of January 28, 2015, were together worth Rs 45,386.86 crore (Rs 32,497.29 crore for ITC and Rs 12,889.57 crore for Larsen and Toubro and based on the shareholding pattern as on December 31, 2014). For reasons which can be best explained only by the government this holding hasn’t been sold till date.
\nThese asset sales can directly finance public investment. As <\/span><\/span><\/span>economist Sajjid Chinoy writes in the Business Standard<\/span><\/span><\/span><\/span><\/span><\/a>: \u201cSo what the government needs is a predictable plan – say of 0.8-1 per cent of GDP for the next 2-3 years of asset sales that are directly ploughed into public investment such as highways, roads, bridges, ports, airports – to offset the private sector’s inability to finance this infrastructure.\u201d
\nFurther, the government needs to sort out the mess that it has made of the disinvestment programme over the last few years (I mean the government in general and not the Narendra Modi government which took over only in May 2014).
\nOver the last few years, the government has assumed that disinvestment of its holdings in public sector units will bring in a lot of money. But that hasn\u2019t turned out to be the case. Take the case of the last financial year when it was assumed that the government will raise Rs 54,000 crore through disinvestment. It actually managed to raise only Rs 19,027 crore.
\nFor this financial year, Jaitley has projected that the government will raise Rs 58,425 crore through disinvestment. But only Rs 1,700 crore has been raised so far, with only around a little over eight weeks left for the financial year to end.
\nNews-reports now suggest that the government is really trying hard to push disinvestment through. Instead of waking up at the end of the financial year, the government along with a big disinvestment target also needs to have an annual plan where it goes about disinvesting shares all through the year. This is a better way of approaching the issue and Jaitley should look at it seriously in the next budget.<\/p>\n

(The column originally appeared on www.equitymaster.com as a part of The Daily Reckoning<\/a>, on Jan 29, 2015) <\/span><\/span><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Vivek Kaul There is a great belief among economists in the Western world that if emerging market nations increase investments in their countries, global economic growth can be revived. Larry Summers, a former US treasury secretary and a Harvard university economist wrote in an October 2014 column in the Financial Times that \u201cthe case for … <\/p>\n

Read more<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"qubely_global_settings":"","qubely_interactions":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[2,10,30],"tags":[342,1008,1290,2055,2424,2865],"qubely_featured_image_url":null,"qubely_author":{"display_name":"Vivek Kaul","author_link":"https:\/\/vivekkaul.com\/author\/vivekkaul\/"},"qubely_comment":0,"qubely_category":"Analysis<\/a> BJP<\/a> Equitymaster<\/a>","qubely_excerpt":"Vivek Kaul There is a great belief among economists in the Western world that if emerging market nations increase investments in their countries, global economic growth can be revived. Larry Summers, a former US treasury secretary and a Harvard university economist wrote in an October 2014 column in the Financial Times that \u201cthe case for…","jetpack_sharing_enabled":true,"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts\/3244"}],"collection":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/comments?post=3244"}],"version-history":[{"count":0,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts\/3244\/revisions"}],"wp:attachment":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/media?parent=3244"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/categories?post=3244"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/tags?post=3244"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}