Reforms Agenda | A key task for the next government will be to kick start infrastructure spending

Published On: 07-May-2019

Election 2019 is underway and even as the summer heat is yet to pick up, the heat and dust of electioneering are raising the temperature. It is a good time to pause and think about the challenges and opportunities that would face the incoming government.

The macro-economic platform is reasonably stable. Inflation is well within the comfort zone of the MPC and the current account deficit appears to be contained at below 2 percent of GDP. The government will likely report a fiscal deficit for FY19 in line with its target of 3.4 percent of GDP. But beneath the headline fiscal numbers, we are worried about the significant increase in borrowings by other public sector entities. This could be about 2.1 percent of GDP in FY20 vs about 1.1 percent of GDP in FY2014.

Further, divestment proceeds from inter-PSU stake sales are of poor quality and the potential for disinvestment is now limited unless the government is willing to sell stakes in its companies to below 51 percent. While not entirely new, delays in payment of subsidies appear to have risen in the last quarter and there is a risk that aggressive tax collection efforts in the final weeks of the fiscal year may witness a reversal early in the next year.

Spending via income support schemes—irrespective of the political construct of the government—appears to be headed higher. Managing the weak fiscal math while making provisions for enhanced income transfer and health care/ social security schemes will be a significant challenge. If we are headed in the direction of direct income support, we will have to in parallel draft a plan for removal of price-based subsidies which are prevalent in fuel, fertilizer, electricity etc. The current level of consolidated (Union, State and PSU) fiscal deficit is not sustainable. Also, it is driven by revenue spending rather than capital expenditure.

The next macro challenge facing us is to find a way to kick start infrastructure spending. This could either come through enhanced public spending or creating a viable model of public-private participation.  What is evident from experience is that the private sector and the financial system is not equipped to bear the risk during the project implementation stage. This is even accurate of long gestation infrastructure projects. This risk will have to be taken by the government. When completed and in running condition, these projects can be sold to investors comfortable with the financial risk.

The sector that needs attention is the power sector. At a time when we have increased supply, the fact is that the sector remains financially stressed. This must be addressed with a federal solution, given that it involves private, public sector companies and state-owned electricity boards. A construction boom in the infrastructure sector will also drive the creation of unskilled and low skill jobs. This will also enhance the infrastructure capacity, which is necessary to raise our overall competitiveness.

The Indian export story has flagged significantly for more than a decade now and this requires attention. Raising the competitiveness of domestic producers not only lifts our overall growth prospects but also helps in creating low, medium to high skilled jobs.  Government and policymakers have to change their mindset—targeting industries or geographies with new policies is not a panacea to the challenges we face. We have to create an environment that enables entrepreneurs and markets to make decisions that create value and jobs.  While we have made progress on the ease of doing business there is a long way to go on this front.

The implementation of goods and services tax (GST) is a victory for the spirit of federalism in India. But we are yet to see a dividend from the implementation of GST by way of a significant surge in tax receipts. Further simplification by reducing the number of tax slabs is the first step. Crucially, we need to move swiftly to bring within the ambit of GST all that was left out—fuel, electricity, real estate etc.   A comprehensive GST with a simple rate structure is our best hope for increased compliance and an eventual increase in tax receipts. This will also raise competitiveness by ensuring that tax set-offs are available throughout the system. Higher tax collections will help India reduce the deficit and this reduced dis-saving frees up more capital for investment.

Financial markets will thrive and grow when the economy does well. Policy makers need to understand and respond to the falling rate of household savings. In FY17 household savings were at just 16.2 percent of GDP, this is near a decade low.  Household savings have declined almost every year since FY2010 when it clocked in at 25.2 percent of GDP.  A part of this could well be cyclical movements but a healthy household savings rate contributes to ensuring adequate availability of domestic capital. A better balance between the consumption aspirations of Indian households and savings would enhance India’s macro-economic stability and growth potential

This article was originally written for


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Author Bio

Vetri Subramaniam
Vetri Subramaniam is the Chief Investment Officer of our Company. He holds a B.Com degree from University of Madras and a Post Graduate Diploma in Management from Indian Institute of Management, Bangalore. He joined our Company with effect from January 23, 2017. Prior to joining our Company, he was associated with Invesco Asset Management Private Limited, Motilal Oswal Securities Limited, Kotak Mahindra Asset Management Company Limited, SSKI Investor Service Private Limited and Kotak Mahindra Finance Limited.