The Economic Survey for 2016-17 was reassuring as it emphasised on fiscal prudence and talked about signs of normalcy returning consequent to remonetisation of the economy: our experience also indicates that most industries are reverting to business as usual.
What echoed with me was the more realistic assessment of growth and its correct identification on potential drag on future growth –the Twin Balance Sheet problems of stressed corporate and banks’ balance sheets. Today, some corporate are heavily leveraged and reflect as stressed assets on banks’ balance sheets.
Most of these are on public sector banks’ books, which account for nearly 70% of total bank credit to industry. The Survey rightly argues that economic growth will not solve the problems of stressed firms: banks’ non-performing assets (NPAs) are estimated to be as high as 16.6% of total loans, and 8.4% of GDP. Can diversion of windfall gains from remonetisation to an Asset Reconstruction Company (ARC), as recommended by the survey, help resolve the Twin Balance Sheet problem?
In my view, ARC is a noble idea but it might not be the most efficient solution at this juncture — the banks have been dealing with NPAs for the last 3-4 years. Setting up a new institution is always an expensive task, fraught with risks and can take very long. And, as aptly quoted by the Survey, “the most costly outlay is time”.(Antiphon the Sophist).
Will the combination of challenges and uncertain global economic conditions become a serious dampener for Indian growth prospects? Not necessarily. There may be other ways that the government, banks and the corporate sector could bring about a revival in GDP growth even in the context of the above constraints. For one thing, listed public sector undertakings (PSUs) could deploy approximately Rs 3 lakh crore of cash and cash equivalents sitting in their balance sheets.
This amount could be leveraged to approximately Rs 9 lakh crore (assuming debt to equity of 2:1). This in turn could seed an increase in the investment to GDP ratio back to 35%, which would require roughly Rs 13 lakh crore. Secondly, the government should continue its focus on boosting capital investment in sectors with higher multiplier effects on GDP growth: the railways, roads and housing are three such sectors.
A review of investment in railways indicates over the last 65 years that the railways have a multiplier effect of 5X. The road sector also offers a similar opportunity in terms of growth gains. The performance in this sector in the last two and half years is very encouraging. Compounded annual growth rate of projects awarded was at 67% over FY14-16! Projects completed increased from close to 4000 km in FY14 to over 6000 km in FY16. Similarly, housing is another sector with significant multiplier effects. Government’s focus on affordable housing has the potential to boost residential construction, and in turn fuel the demand for cement and steel sectors: the housing sector contributes approximately 60% of cement and 35% of steel demand.
Lastly, the Government has stayed the course in its efforts to address execution challenges even if gains might come with a certain lag. The push towards digital economy post remonetisation, likely implementation of GST, and continued expansion of Direct Benefit Transfer has the potential to propel us to a higher growth trajectory.