Spend Po­lit­i­cal Cap­i­tal, Re­cap­i­talise the Banks

That is a pre­req­ui­site for sus­tained growth

The Economic Times - - Breaking Ideas -

The lat­est data on in­fla­tion, for Septem­ber, and in­dus­trial pro­duc­tion, for Au­gust, both of­fer some cheer. Food in­fla­tion is muted, rather than gal­lop­ing ahead, as many had feared, and over­all con­sumer price in­fla­tion is only 3.3%. It is a dif­fer­ent mat­ter that this could well sig­nal yet more farm dis­tress. The in­dex of in­dus­trial pro­duc­tion (IIP) for Au­gust went up 4.3%, a rate of growth higher than in any month this fis­cal so far. Min­ing and elec­tric­ity have risen the fastest. Cap­i­tal goods have risen by 5.6%, but over­all man­u­fac­tur­ing growth re­mains tepid at 3.1%. The fact re­mains that growth will get go­ing only when fixed cap­i­tal for­ma­tion as a pro­por­tion of GDP comes off its present low — lower than at any point since 2003-04 — and edges up over 30%.

Af­ter the de­stock­ing that was ex­pected in the run-up to launch of GST, whose treat­ment of legacy in­put tax on stocks was hazy for most pro­duc­ers, Au­gust should have been a hec­tic month of re-stocking. That has not quite hap­pened. But the fact re­mains that min­ing has shown growth in ex­cess of 9% in Au­gust, and that would trig­ger an uptick in de­mand for com­mer­cial ve­hi­cles to trans­port what­ever is mined. But there re­mains con­sid­er­able slack in ca­pac­ity util­i­sa­tion by in­dus­try, which means pri­vate in­vest­ment will re­main tepid. Only if in­vest­ment in in­fra­struc­ture picks up, or that in the un­in­cor­po­rated sec­tor, which merges in the data for house­holds, picks up can the econ­omy see sus­tained mo­men­tum in fixed cap­i­tal for­ma­tion. Pub­lic in­vest­ment and re­vamped pub­lic-pri­vate part­ner­ship (PPP) must pro­vide the lead in the sec­tor. The good news is that there is ex­ten­sive paucity of in­fra­struc­ture in the coun­try. The prob­lem is that this is matched by paucity of vi­able projects to build in­fra­struc­ture. Then, of course, banks are not in a po­si­tion to fi­nance in­fra­struc­ture build­ing, given their bad loan bur­den.

The gov­ern­ment must step up the pace of cre­at­ing new PPP projects in in­fra­struc­ture and spend po­lit­i­cal cap­i­tal on clean­ing up the banks’ books and re­cap­i­tal­is­ing them. This would en­tail some pain. But with­out that, there would be no gain ei­ther.

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