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Should the govt revive the economy?
Fri, 7 Aug Pre-Open

The Indian economic recovery is still at a nascent stage. Growth across various sectors has still not picked up. A lot of economic reforms were expected from the government when it came to power last year. Unfortunately, we have not seen too many. A few big projects and programs have been launched. But corporate India is not impressed. Without sustained private sector investments, we believe India will not achieve high growth.

However, the government seems to have a different view. As per an article in the Economic Times, the government is planning to step in to the private sector's shoes! The Finance Minister has stated that the government would spend as much as possible out of budgeted funds on infra projects. The government has already asked Parliament to approve an additional Rs 255 bn in spending this year. While nearly half of this amount will go towards re-capitalising PSU banks; the rest has been earmarked for additional infra investments.

We believe private investment is far more productive than investments made by the government. If India's GDP has to grow at a rate above 8% on a sustainable basis, the government will have to enable huge private sector investment in the economy. Only this can lead to a broad based, sustainable economic recovery. So far this has not happened. In the first three months of FY16, capex growth in the PSU sector has been 16.5% while the same for the private sector has been just 1.1%. The government believes that green shoots are already visible in the economy. However, we will gain confidence about the recovery only when private capex growth moves up significantly.

This won't happen without key issues getting resolved like land acquisition, GST, PSU bank NPAs, disinvestment, bureaucratic red-tape and labour problems. The government has so far been successful in sorting out environmental issues, providing speedy approvals at the ministry level and quickly sanctioning large amounts of money. However, this won't be enough. A lot more needs to be done. Attempting to replace the private sector as the main engine of the economy with public funds, will do more harm than good in the long term we believe. One needs to look only back at the UPA years for proof.

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