Home / Opinion / Keep plugging away patiently

On 29 August, the Reserve Bank of India (RBI) released its annual report for 2015-16. Then, two weeks later, it released its monthly bulletin for September. Between these two events, there was a change of personnel at the top. Hence, the annual report was noticed only for the foreword written by the outgoing governor. The contents of the annual report in terms of what they meant for the economic health of the country were a mixed bag, with more negative than positive news. The monthly bulletin contained clearly downbeat news.

Let us get the good news out first. The second chapter of the annual report has a detailed macroeconomic review. The good news is that there has been a definite downtrend in the number of stalled projects. In the private sector, stalled projects numbered 407 in 2011-12 but in 2015-16, they had dropped to 242. The story is not that cheerful in the case of stalled projects in the public sector. Yet the annual report expressed the hope that “the slackening of the overall rate of investment in 2014-15—for the third year in succession—could have bottomed out in 2015-16."

The reality has not matched hopes. Not yet. Fixed assets investment in inflation adjusted terms rose 3.9% in 2015-16 versus 4.9% in 2014-15. As a share of gross domestic product (GDP), it dropped to 31.6% in 2015-16 from 32.3% in the previous year.

There is more worrying information in the RBI monthly bulletin for September. It has a chapter on the phasing of capital expenditure by companies that file to raise money from banks, financial institutions, through external commercial borrowings, foreign currency convertible bonds and equity issuance. In these cases, companies indicate the purpose for which the funds are raised and how they would be invested in the years ahead. Debt raised through private placement and funds raised through foreign direct investment are not included in this. The phasing of capital expenditure raised through these above sources has been showing an alarming declining trend. It was Rs3.4 trillion in 2008-09 and it is estimated to be a meagre Rs67,400 crore in 2016-17. The drop in the last two years and into 2016-17 has been steep.

The bulletin has another chapter on the movement of order books, capacity utilization and inventories in the 12 months from April 2015 to March 2016. Its conclusions are sombre: “Overall, Indian manufacturing sector did not appear to witness any turnaround, as indicated by the survey results."

Then, there is the bank credit growth data. RBI monthly data on credit flows to different sectors is now available up to July 2016. Credit to micro, small and medium and large industrial enterprises from the banking sector is simply not flowing. The annual growth rates of bank credit to these three categories are -3.3%, -8.7% and +1.7%, respectively. One area where credit growth is doing nicely is in the personal loan category. The annual growth rate is nearly 19%. One has mixed feelings about it. India’s consumption share of GDP is quite high already and it is reflected in the deteriorating rate of household savings, which stood at 18.7% of gross national disposable income in 2014-15, down from 23% in 2011-12. Lower domestic savings is the same as higher external deficit and higher dependence on portfolio and other flows from overseas. Vulnerability on that score remains high.

For now, the economic growth rate is being driven by public spending and private consumption expenditure. To the extent that public spending is geared towards “crowding in" private investment eventually, it is a good thing. But the annual report of the RBI notes that the fiscal situation of the Union government deteriorated in the first quarter of the fiscal year 2016-17. Both the revenue deficit and the gross fiscal deficit are higher than those in the corresponding period of the previous year. The annual report notes further that capital expenditure registered a significant decline both under Plan and Non-Plan heads. Some of these could be reversed as the year progresses. More disappointing is the fiscal performance of state governments.

Key deficit indicators of the states (based on data from 26 states) as per revised estimates (RE) were worse than budget estimates. As against the budgeted ratio of 2.4% (states’ gross fiscal deficit (GFD) to states’ gross domestic product ratio), RE is 3.3% mainly due to higher revenue expenditure. Capital outlays remained stable. That this happened despite a big jump in the states’ share of the central tax pool as per the Fourteenth Finance Commission recommendations must be quite worrisome. RE of the combined GFD of the Union and state governments for 2015-16 is 7.2%, higher than the 6.5% in 2014-15.

Overall, the message is that underneath the relief of a decent monsoon and the legislative successes of the government in recent months, the health of the economy is fragile at best. Reviving economic growth is not easy amid rising global economic and political uncertainties and domestic balance sheet problems.

Hence, the temptation to conjure it up through aggressive rate cuts or exchange rate depreciation must be avoided. The long-run costs will easily exceed speculative (not guaranteed) short-term benefits. The government is doing the right thing by trying to crowd in private investment and by courting foreign investment to make up for domestic investment shortfall. It should be patient and keep plugging away. More importantly, it must put a stop to hare-brained ideas, and public discussion of them. The damage they cause is both economic and reputational.

V. Anantha Nageswaran is an independent financial markets consultant based in Singapore.

Comments are welcome at Read V. Anantha Nageswaran’s previous Mint columns at

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