Spend Political Capital, Recapitalise the Banks
That is a prerequisite for sustained growth
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.