India must revive PPPs and reform its bond market to boost economic growth

Mint columnist Vivek Kaul has pointed out how non-financial listed companies have struggled to grow net sales by just a percentage point and how household indebtedness has risen.

Talk of India being the world’s fastest growing large economy brings little cheer to Indians, except at top levels of the pyramid. In 2024-25, only agriculture and government services are likely to grow faster than in 2023-24, and that too, only marginally. To step up the pace of India’s economic expansion, we need proactive policy.

The question, of course, is how. Investment is the surest way to lift the economy’s trajectory, with its multiplier effect. And it is not enough to rely just on public expenditure, which wins plaudits for the focus of its outlay, but does not always get spent on the ground.

Figures from the controller of government accounts show that, up to November 2024, the Centre received 59% of its budgeted revenues this fiscal year, but spent only 46.2% of the budget’s capital outlay.

At a time of tardy private investment, stepped up public investment is expected to play the role of crowding in private investment. Holding it back, as New Delhi has done so far this year, does not help.

Also read: Well designed public-private partnerships should be used for goal-oriented growth

Manufacturing capacity utilization has been stuck around 75% for about a decade now. So, hot sunrise industries apart, the private sector has no market incentive to invest in factories. Production props have worked unevenly, with fewer hits than misses. In infrastructure, which once attracted private participation, the Centre appears keen to do the heavy lifting on its own.

To regain a balance for optimal results, India must reinstate a public-private partnership (PPP) policy for infrastructure. The government’s chief role could be in planning, zoning, issuing swift clearances and early-stage investment. The risk premium on such finance peaks in the early stages of a project.

Once all the okays are obtained and construction begins, risk drops. If public funds can see a project through this phase, overall costs would decline. Just a risk re-rating does not mean easier access to bank loans. Banks, whose own liabilities have relatively short tenures, are not ideal suppliers of capital to long-gestation infra projects; rather, the debt market is.

In short, for India to step up investment, it must create viable projects, forge a new PPP model and free India’s bond market of fetters. As a proportion of GDP, this market is about half its potential size. To put the role of debt in perspective, the world’s outstanding debt is some 130% of global GDP, while its stock-market cap is only about 100%.

Also read: Revive public-private partnerships in infra to boost GDP growth

India’s debt market is schizophrenic: government securities are regulated by the central bank, while corporate bonds are under Sebi’s watch. Corporate bonds are priced in a way that their yields reflect a risk premium over what safe government bonds of similar tenure yield.

But their differential regulation thwarts efficient flows of capital between the two segments; this weakens not only the effect of price signals on each other, but also the use of derivatives meant to hedge against credit, interest and currency risks.

Long debt recovery processes and weak contract enforcement hamper the bond market too. Letting only well-rated bonds be traded has also stunted it. Fixing this market should be top priority.

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