Mumbai: India’s biggest money managers have one piece of advice for Prime Minister Narendra Modi: Investors will forgive a higher budget deficit if the cash is spent on roads and bridges instead of food and fuel subsidies.

India’s top four asset managers, who oversee about $85 billion—or half the money invested in local mutual funds—said the government needs to take the lead in creating assets. Private investment fell to 8.5% of gross domestic product (GDP) in 2013, the lowest in government data going back to 2005.

“We need to stimulate growth, and initially it has to be from the government’s end," said Mahesh Patil, who oversees $17.5 billion as the co-chief investment officer at Birla Sun Life Asset Management Co., India’s fourth-biggest money manager. “If subsidies are under control and expenditure is in the right direction, then a slightly higher deficit will not be taken negatively by the markets."

Modi faces pressure to more clearly explain his vision for India’s economy when his government unveils its first full-year fiscal budget on 28 February. While he has committed to narrowing the fiscal deficit to a seven-year low of 4.1% of GDP, where the money ends up is just as important as how much is spent.

Successive governments have cut spending on infrastructure to narrow the fiscal deficit. Subsidies accounted for 15% of total spending in this year’s budget from 10% a decade ago, while expenditure on roads, ports and power plants has dropped to 6.2% from 10% in that time.

Markets buoyant

Reversing that trend would help sustain a surge in stocks and currency. Overseas investors have poured more than $7 billion into Indian stocks and bonds so far this year after an unprecedented $42 billion worth of purchases in 2014. The S&P BSE Sensex index has soared 43% over the past 12 months and the rupee is Asia’s best performer this year.

“There are expectations building up before the budget and the market should remain buoyant," Arindam Ghosh, the chief executive officer (CEO) at Black Ridge Capital Advisors in Mumbai, told Bloomberg TV India. “These are good times to start investing into the market with a long-term perspective."

While the government expects the economy to expand 7.4% in the year through March, other indicators show sufficient slack for the Reserve Bank of India (RBI) to further lower interest rates. RBI governor Raghuram Rajan this month said he’d like to see stronger economic growth, softer inflation and a shift in government spending toward infrastructure.

The 48% slump in oil over the past year has made life easier for finance minister Arun Jaitley. A lower subsidy bill and higher taxes on fuel could give him an extra 1 trillion, almost 1% of GDP, to spend on roads and bridges, Barclays economist Siddhartha Sanyal projected. It would also help give India its first current-account surplus in a decade.

Revenue deficit

One number that fund managers will be looking at is the revenue deficit, or the difference between collection and expenditure. Unlike the fiscal deficit, this excludes any additional amount that is borrowed for capital expenditure.

The revenue deficit is projected to fall to 1.6% of GDP in the fiscal year through March from an unprecedented 5.2% in 2009/10 when India boosted stimulus, according to government data. That would give Modi more room to borrow for infrastructure spending.

“If you want a faster kickstarting of the investment cycle, then it can happen only by a lower revenue deficit and higher fiscal deficit," S. Naren, chief investment officer at ICICI Prudential Asset Management Co., which oversees $22 billion as India’s second-biggest asset manager, said in a 13 February interview. “Government is in a position to kickstart the investment cycle."

Hoarding cash

Government investment amounted to 7.8% of GDP in the fiscal year through March 2013, the latest for which data is available from the finance ministry. That’s lower than the average of 8.4% of GDP in data going back to 2005.

State companies have been hoarding cash as uncertainty under Modi’s predecessor left India as the only big emerging market where investment fell as a percentage of GDP. Five of them—Coal India Ltd, Oil and Natural Gas Corp., NTPC Ltd, NMDC Ltd and Bharat Heavy Electricals Ltd—have about $19 billion in cash and equivalents, or 1% of India’s GDP, according to Bloomberg calculations based on exchange filings.

State-owned companies have been told to start investing more, said two government officials with knowledge of the matter, asking not to be identified as the move hasn’t been publicly announced. The administration last month also completed its biggest asset sale, earning at least $3.6 billion by selling shares in monopoly miner Coal India.

‘Less worried’

With investors “less worried" about the fiscal deficit, the government must focus on simplifying tax rules and reducing transaction times and costs, according to Prashant Jain, India’s biggest money manager, who oversees $24.4 billion as chief investment officer at HDFC Asset Management Co.

Modi has sought to improve India’s ranking in the World Bank’s Ease of Doing Business gauge by simplifying regulations and disciplining the bureaucracy. The nation was 142nd among 189 in the 2015 index, compared with 140 the previous year.

Until measures to help the private sector are implemented, investors are looking to the government to spur growth.

“Private investment will start with a lag," said Sunil Singhania, chief investment officer for equities at Reliance Asset Management. “As long as one knows what this fiscal deficit is for, I don’t think there’s an issue." Bloomberg