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Economic Survey 2015: Where Do We Expect to Find our Investments


What a day it has been. What a week in fact. Capital Mind has been getting plenty of attention for our posts on the Budget, and now that we are tantalizingly close to D-Day (or B-day as we call it), the expectation has reached a fever-pitch, with all eyes on the FinMin due to start his Budget session in a while. The Budget week has always been an exceedingly interesting one for us, what with our love for data and outliers and inferences that you cannot find anywhere else. Our search for the same takes us to yesterday’s mega-event: The Economic Survey for 2014-15.

Released by the CEA Arvind Subramanian yesterday, the Economic Survey 2014-15 offers a detailed outlook of the economic scenario that has persisted during the previous financial year, and provides insights into what the rest of the calendar year has in store for us. Of course, since the report does come directly from the PMO, we take some of the positive adjectives used in the Survey with a pinch of salt, but that does not take away from the fastidious approach that has been used in compiling it.

In brief, the Survey seeks to explain/de-mystify issues related to the following:

  • Stalled Projects;
  • Banking system;
  • Railways;
  • Manufacturing sector;
  • Agriculture;
  • Climate Change (India is increasingly being recognized as one of the world leaders in the area of climate change)
  • Centre-State fiscal relations

The Survey also stresses the importance that has been placed in innovation for dealing with various economic hurdles.

Investments in India

One of the key focuses in this edition was on Investment sentiment towards Indian markets. Let’s look at a few excerpts from the Economic Survey:

“Private investment must remain the main engine of long-run growth. But, in the short to medium term, as the near-intractable problems get slowly resolved, public investment, especially by the railways, will have to play a catalytic role.”

“Four factors pose risks to the external situation:

  • Renewed financial market volatility in response to US Federal Reserve monetary tightening which is expected later this year;
  • Possible turmoil if the viability of the Eurozone were to come into question in the event of a Greek exit;
  • A spike in oil prices related to geopolitical events; and
  • A slowly deteriorating international trade environment.”

“India can balance the short-term imperative of boosting public investment to revitalize growth with the need to maintain fiscal discipline. Expenditure control and expenditure switching, from consumption to investment, both in the upcoming budget and in the medium term will be key.”

““The balance sheet syndrome with Indian characteristics” creates a web of difficult challenges that could hold back private investment. Private investment must remain the primary engine of long-run growth. But in the interim, to revive growth and to deepen physical connectivity, public investment, especially in the railways, will have an important role to play.”

To elaborate, the impression is that owing to favorable economic conditions, our Current Account Deficit, which has already reduced to 1.3%, can be reduced further to 1.0%. Since this concerns our trading relationships more than our internal business environment, the major effect it can have is to improve investor confidence in India, knowing that our economic fundamentals are strong, coupled with our massive $340 bn worth of foreign reserves. It should also be noted that if the CAD position does get stronger and much too soon, we will definitely see an upward pressure on the value of the rupee; but of course, that’s where the reserves come into play to protect our currency and our exporters.

But I digress. The next point is that the Fiscal Deficit for the coming year is targeted to be reined in at 4.1%. Despite reduced Revenues and delayed divestment, new excises on petrol and diesel combined with reduced subsidies, create an enforced expectation of meeting this target. The CEA believes that the medium-term target must be 3%, which is comparable to that of emerging market peers and in pursuit of that target, expenditure should be moved from consumption to investment. There are a few risks that could threaten this optimistic target, including further positive oil price shocks, US interest rate hikes which could lead to money being sent there; money which would otherwise have been parked in India, and other macro-economic events such as the Grexit and many more. The ones mentioned here could especially induce some volatility in the markets.


The chart above has been taken directly from the Economic Survey itself.

Arriving at the crux of the topic; Public and Private Investments. The Survey brings up a wonderfully crafted analysis of the major challenges that the Government sees ahead for private investments. They term it “The balance sheet syndrome with Indian characteristics”. The beautiful Indian-ness to it has obviously been overshadowed by the negative connotations. Now what are these challenges?

  • Weak profitability and over-indebtedness of the Indian corporate sector; evinced by low Interest Coverage Ratios.
  • Perceptibly weak bankruptcy mechanisms to overcome over-indebtedness.
  • The Institutional challenge which comes with overturning existing Public-Private Partnership models (which are fundamentally flawed, evidenced by existing investment voids) and charting a new path forward.
  • PSBs have horrendous levels of NPAs; in the wake of RBI clamping down severely on rising NPA ratios, this restricts their ability to lend to corporates.
  • Inherent Risk Averse investing by Indian companies.

The way to circumvent these issues would be to raise the funds required for investment via the public. In pursuit of this end, the government has identified Railways as the first sector that could be used to funnel public investments. By slowly and steadily increasing the share of public investments, while simultaneously improving the lending capacities of the private sector, growth can be nurtured in our economy.

Now the plan of the CEA is to boost public investment in the railways for a start. Boosting investment here, would spur growth of industries, esp. manufacturing, thereby adding to the GDP in a significant way. Their words, not ours. Let’s dissect this further.

The Railway Budget presented yesterday saw plenty of palliatives being dished out to soothe the nerves of the daily traveler. Even the not-so-often traveler, but mainly the daily ones. Focus on upgrades mainly, through improving cleanliness, introducing wi-fi at stations, lifts and escalators, added options for the differently-abled and many more. The plan is to spend a truck load of moolah on these upgrades, Rs. 8,56,020 cr. over 4 years to be precise. And the push is for public investment to fund it. That’s more than 30 billion dollars a year. We believe that there should be some sort of financial incentive for people to start moving their investments to yet another government vehicle, enhanced returns at least. That is a whole lot of ifs and buts and hopes and desires to bet your money on (literally). We wrote about why the goal of raising more than Rs. 200,000 cr. each year for the next 4 years for the Railways alone, would be a hard ask, considering the dearth of public funds to support such an investment.

The current scenario for the major large-scale lenders like PSBs does not look great. As we have seen during the Q3 results announcements period:

Banks Q3

Total Net Profits of Banks went up by a meagre 3.6%. This despite funds being infused into the banks throughout the quarter, which thus resulted in a near-30% drop in EPS.

Apart from their shoddy financial performance, banks have been undergoing their own financial worries, what with their NPAs soaring skywards and the looming Basel-III recommendations. The onus would now have to come on other sources to fund the government’s ambitious investment plans.

We will look at the other major talking points in the Economic Survey 2015 in separate posts. The Banking system and its inherent deficiencies, for example, have been covered extensively. For now, we are expecting some policy-support to spur investments later when the Budget is announced.


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