The govt needs to think out of the box to finance public investment - The Daily Reckoning
The Daily Reckoning by Vivek Kaul
On This Day - 29 January 2015
PRINTER FRIENDLY | ARCHIVES
The govt needs to think out of the box to finance public investment A  A  A

- By Vivek Kaul

Vivek Kaul
There is a great belief among economists in the Western world that if emerging market nations increase investments in their countries, global economic growth can be revived. Larry Summers, a former US treasury secretary and a Harvard university economist wrote in an October 2014 column in the Financial Times that "the case for investment applies almost everywhere".

And given that private investment is slowing down, the government needs to increase public investment seems to be the prevailing view. This becomes even more important with the International Monetary Fund recently deciding to revise global growth downward by 0.3% in 2015 and 2016 to 3.5% and 3.7% respectively.

The Indian government seems to be thinking of giving a push to public investment. The finance minister Arun Jaitely said so a few days back: "I think we have to take some special steps as far as public investments is concerned." In yesterday's column I had argued that the government needs to be careful about how it goes about financing the public investment programme that it may unleash in the next budget.

The recent evidence in favour of a public investment programme is not very strong. Many emerging market countries tried increasing public spending in the aftermath of the financial crisis in the hope of creating economic growth, only to see it not work and lead to other major problems.

--- Advertisement ---
Small Caps for Big Returns...

There are many investors who avoid investing in small cap stocks altogether.

The simple reason being they consider small caps to be too risky.

However, after researching for over 6 years we've defined a way of identifying high potential small caps that are already delivering strong returns...

Returns like 250% in 2 years and 1 month, 217% in 3 years and 11 months, 175% in 4 years and 5 months... amongst many more.

Now we are sure you're interested to know more about such companies and how we're picking them out!

So click here for full details...
---------------------------

As Ruchir Sharma author of Breakout Nations explained in a recent column in the Wall Street Journal: "Before anyone rushes to spend, however, it is worth noting that the big emerging nations, including China, Russia and Brazil just tried a full-throttle experiment in stimulus spending, and it failed. The average growth rate for emerging economies excluding China has fallen to 2.5% today, from more than 7 % at the height of the spending campaign. That is the lowest growth rate in four decades, outside of a global recession. For leaders in these countries, stimulus is now a bad word." The Chinese growth also recently touched a 24 year low of 7.4%.

So what went wrong? "Emerging nations borrowed from the future to produce that flash of growth in 2010, and now they face the bills. Their government budgets have fallen into the red, from an aggregate surplus equal to 1.5% of GDP in 2007 to a deficit equal to 2% of GDP in 2014. To pay for this deficit spending, public debt has risen significantly, throwing the books out of balance," wrote Sharma. This is a point that Jaitley in particular and the Indian government in general should keep in mind, before they go on to take "special steps as far as public investments is concerned".

The rating agencies and the foreign investors are watching India closely after Jaitley said in his maiden budget speech that "my roadmap for fiscal consolidation is a fiscal deficit of 3.6 per cent for 2015-16 and 3 per cent for 2016-17." In the current financial year the government is aiming for a fiscal deficit of 4.1% of the GDP.

Given this, it is important that the government has a clear idea of how it will go about financing the "special steps" for public investment. One way out is to resort to asset sales. Asset sales does not just refer to the government disinvesting its shares in public sector units as well as other companies.

Take the case of Indian Railways, which owns huge tracts of land all around the country. Some of this land can be sold to generate revenue for revitalization of the Railways. Given the shortage of land in cities, this move can garner a good amount of revenue. Also, it is important to carry out some sort of an exercise which tells the government clearly how much land does the Railways actually own.

Over and above this, the Railways can also look at raising money by branding trains and stations. This is a move that has been tried in the past at least with Mumbai local trains. Also, stations on the Rapid Metro route in Gurgaon are sponsored by corporates. This can be one way of raising some "easy money" for the revitalization of Indian Railways. Also, it is worth pointing out that Railways is not the only department sitting on a huge amount of land.

If the government puts its bureaucrats and advisers to some use, such out of the box ideas will come out. Further, there is some low hanging fruit that the government can easily cash in on. One such low hanging fruit is the shares that the government owns through Specified Undertaking of Unit Trust of India (SUUTI) in ITC and Larsen and Toubro which as of January 28, 2015, were together worth Rs 45,386.86 crore (Rs 32,497.29 crore for ITC and Rs 12,889.57 crore for Larsen and Toubro and based on the shareholding pattern as on December 31, 2014). For reasons which can be best explained only by the government this holding hasn't been sold till date.

These asset sales can directly finance public investment. As economist Sajjid Chinoy writes in the Business Standard: "So what the government needs is a predictable plan - say of 0.8-1 per cent of GDP for the next 2-3 years of asset sales that are directly ploughed into public investment such as highways, roads, bridges, ports, airports - to offset the private sector's inability to finance this infrastructure."

Further, the government needs to sort out the mess that it has made of the disinvestment programme over the last few years (I mean the government in general and not the Narendra Modi government which took over only in May 2014). Over the last few years, the government has assumed that disinvestment of its holdings in public sector units will bring in a lot of money. But that hasn't turned out to be the case. Take the case of the last financial year when it was assumed that the government will raise Rs 54,000 crore through disinvestment. It actually managed to raise only Rs 19,027 crore.

For this financial year, Jaitley has projected that the government will raise Rs 58,425 crore through disinvestment. But only Rs 1,700 crore has been raised so far, with only around a little over eight weeks left for the financial year to end.

News-reports now suggest that the government is really trying hard to push disinvestment through. Instead of waking up at the end of the financial year, the government along with a big disinvestment target also needs to have an annual plan where it goes about disinvesting shares all through the year. This is a better way of approaching the issue and Jaitley should look at it seriously in the next budget.

Through what other ways can the government generate enough revenues to finance the public investment programme? Post your comments or share your views in the Equitymaster Club.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Get The Daily Reckoning directly
in your mail box.
Just enter your e-mail address » 

Read our Privacy Policy and Terms Of Use.

Equitymaster requests your view! Post a comment on "The govt needs to think out of the box to finance public investment". Click here!

3 Responses to "The govt needs to think out of the box to finance public investment"

Sarat Palat

Jan 30, 2015

In order to raise income branding in trains is acceptable. But, I do not agree with the suggestion of selling the shares of ITC & L&T. Already both of them are doing pretty well and chances of getting more value and income in future is pretty high. The Govt. could disinvestment their holding in PSU's.

Like 

PRABAKARAN BOOPAL

Jan 29, 2015

This is thought awakening article for how to raise money for public investing.More so about your comment how to make money from railways as i have found vast st reach of lands unused.one question is as you told in your article the public investment involves highways forming and building bridges.This means the govt itself involved in this or private partys will be used.

Like 

sbabu

Jan 29, 2015

Many metros have camps of defence units in prime locations (e.g., Bangalore). Moving atleast some of these units to places outside metros may help in achieving multiple things. 1. Get some cash for govt for the space freed up. 2. Designate the freed up prime locations for setting up sustainable development units and infrastructure units (may be things like cold storages, and other such cargo areas). 3. When these defence units move out to newer areas (using part of the money obtained by vacating prime locations), they trigger organized development in the new semi-urban areas. 4. This will also help to curb real-estate prices to some extent.

Like 
  
Equitymaster requests your view! Post a comment on "The govt needs to think out of the box to finance public investment". Click here!

Recent Articles:
Deep State First
August 23, 2017
Nowhere was the darkness deeper than in the nation's capital. There, no light shone. No flicker of awareness...observation...learning...or reflection appeared.
A Darkness Is Spreading Across the US
August 22, 2017
Today, we are attacked by one preposterous thing after another, each of them even more absurd than the last.
Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working
August 21, 2017
Most Indians who cannot find jobs, look at becoming self-employed.
Trump Takes a Beating
August 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.