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Business News/ Market / Mark-to-market/  How the govt used bank funds as a substitute for public investment
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How the govt used bank funds as a substitute for public investment

Total government spending as a proportion of GDP has been going down

Banks with their huge bad and restructured loans, are in no position to lend to infrastructure. Photo: AFPPremium
Banks with their huge bad and restructured loans, are in no position to lend to infrastructure. Photo: AFP

The government’s mid-year analysis report makes the point that public investment is a must, simply because the private corporate sector is over-indebted and unable to undertake additional projects. Banks too, with their huge bad and restructured loans, are in no position to lend to infrastructure. The government’s position that the fiscal consolidation road map may have to be given up to enable government investment is controversial, but they are right when they say the government has failed to expand investment.

Chart 1 shows how capital expenditure as a percentage of total central government budget spending has been coming down steadily ever since liberalization. There are many reasons for the decline. One of them was the realization that high fiscal deficits are counter-productive in the Indian context. The inability to improve the tax-to-GDP ratio was another reason. The rise in subsidies in recent years, too, left precious little resources for infrastructure. Subsidies as a percentage of total expenditure went up from 11% in 1991-92 to 18.2% in 2013. Over the same period, capital expenditure as a proportion of total expenditure went down from 26.1% to 11.8%, as the chart shows. But it wasn’t just that the proportion of capital expenditure went down—central government expenditure as a percentage of GDP fell from 17.96% in 1990-91 to 13.94% in the 2014-15 budget. In other words, total government spending as a proportion of GDP has been going down. Whatever be the reasons, the fact of the matter is that government investment suffered.

But if funds from the government were no longer so easily available, what took its place? Infrastructure spending continued, but this time the view was that the private sector should be involved in it and the public-private-partnership (PPP) model was seen as a panacea for the resource crunch in the public sector.

Chart 2 shows what happened very starkly—bank lending took up the slack. Infrastructure loans by banks as a proportion of non-food credit went up from a mere 1.1% in 1998 to 15.4% currently. Note that these very long gestation loans are not very suitable for banks and give rise to asset-liability mismatches. Nevertheless, in the absence of alternatives, public sector banks were pressed into service to fund infrastructure. The rest of the story is well known—lack of feedstock, inability to hike power tariffs, rampant crony capitalism and flawed policy all combined to stall these projects. The PPP model fell into disrepute. The wheel has now come full circle and it is the banks that have been left holding the can. But these are public sector banks and in the ultimate analysis, the burden will have to be borne by the taxpayer.

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Published: 23 Dec 2014, 12:46 AM IST
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