On Monday, RBI transferred Rs 1.76 lakh crore to GoI. It’s a much-needed shot in the arm of the finance ministry that, last Friday, had announced a raft of measures to revive the economy. These measures — recapitalisation of banks, refund of input tax credits to businesses and exporters, clearing of dues of public sector undertakings (PSUs) — are aimed at improving liquidity in the system.
By reducing the fiscal deficit, the RBI transfers will further help improve availability of funds for the private sector. But the real problem isn’t a shortage of liquidity. Money hasn’t disappeared from the system. It’s just that nobody wants to use it for investment. Interests are low, and expected to fall further, and global debt with negative yields has ballooned to $17 trillion.
With plummeted cost of debt, one would expect investors to queue up to borrow to invest. But that’s not happening. The debt-equity ratio is at an all-time low. Consequently, the total investment has declined to less than 30% of GDP, lowest in the last 15 years. Clearly, increase in liquidity in itself is not enough.
Moreover, GoI appears to be rigid about fiscal deficit targets, and tax collection is expected to fall short of expectations. Still, several measures can be taken without violating fiscal limits. GoI should use the RBI reserves received to expedite investment of Rs 2,27,849 crore budgeted for the Pradhan Mantri Gram Sadak Yojana, Bharat Mala and the Indian Railways. Today, infrastructure investment is key to reviving the economy.
Bundles of roads, highway, railway tracks and urban development projects should be rolled out double-quick. This will immediately boost core sectors like steel, cement, petroleum and power. It will also attract private sector investment in infrastructure and increase competitiveness by reducing logistical bottlenecks.
Second, woes of the real estate sector must be addressed urgently. While the demand slowdown in the auto and FMCG sectors is cyclical, several structural issues have brought them to a grinding halt. Unlike in the past, black money-backed speculative demand for housing and land has disappeared. Lakhs of housing units are lying unsold. Many projects have been abandoned and the resulting non-performing assets (NPAs) have contributed to the crisis in the non-banking financial companies (NBFC) sector.
NBFCs face acute shortage of equity and credit. What has made things worse is that multiple authorities — Real Estate (Regulation and Development) Act (Rera), National Company Law Tribunal (NCLT), consumer courts — have jurisdiction over the disputes arising from the sector. Consequently, restructuring and liquidation processes have got delayed. A legal framework with a single forum is needed. Moreover, interests of individual investors and lenders deserve precedence over claims of tax and law enforcement agencies.
Future demand is going to come mostly from buyers of small- and medium-size houses who would prefer to move into houses. The low interest rates will surely help revive the demand. However, for a revival, it’s critical that abandoned projects are completed, which requires infusion of equity capital along with debt funding. There is a case for relaxing foreign direct investment (FDI) norms to encourage inflows of foreign equity capital. Tax incentives can be used to encourage long-term investments. A similar logic applies to the NBFC sector.
Next, GoI should start acting like a responsible business partner. It’s not enough to instruct PSUs to clear their dues. Payments delayed by the Centre are a more serious problem. The Centre owes thousands of crores to various public and private sector entities. This forces vendors and contractors to borrow from the market and raise the cost of supplies. It is also a leading cause of project delays, and contractual disputes involving government agencies. By paying the sums it owes, GoI can provide a big stimulus to the demand and economic activities. Moreover, the invoice-generating software for the goods and services tax (GST) can be improved to ensure timely refund of input tax credits.
Refunds are pending mostly on account of mismatch between returns filed by suppliers and corresponding buyers. GoI should provide free software that generates invoices for trading partners. A good software can ensure that the returns of sellers and buyers match at the invoice level. This will check fraudulent practices, while ensuring that due tax credits are not delayed.
Finally, GoI should expedite strategic monetisation of assets such as operational highways, railway stations and airports that offer ample scope for raising resources needed to fund infrastructure investment.
Real estate investment trusts can be used to monetise large tracts of government-owned land. Also, this is a good time to borrow cheap from overseas markets. These measures will go a long way in restoring the economy to a high-growth path without compromising fiscal discipline.
The writer is professor, Delhi School of Economics