Can the Union Budget 2019 pull the Indian economy out of the trough?

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The Economic Survey 2018-19 prescribes an investment-led recovery for the economy, fuelled by high savings with a focus on the export market. This virtuous cycle is to spur job creation and help India clock an annual 8% growth rate, making it a $5-trillion GDP by 2025; the higher savings precludes domestic consumption as the driver of final demand. The blueprint is probably sound given it is based on the experience in other South Asian economies.

However, given the anaemic investments, flagging consumption and rising joblessness, this strategy cannot help pull the economy out of the trough it has fallen into.

Stimulating investment will be difficult at a time when capacity utilisation is just about 74-75% and the cost of capital is high. Without better visibility on demand, local entrepreneurs have little incentive to risk capital, especially when it is expensive. Whatever capital was available, has been put to work—there has been meaningful investment, in the last three years, through the M&A route, including the purchase of distressed assets via IBC. Consequently, today, there is very little equity capital left with corporate India to seed a project.

More critically, companies remain highly leveraged, so banks are going to be very cautious about lending to risky infra projects. It is hard to see much investment by the private sector for another three years, and given how the government is nearly broke, one doesn’t expect too much of a jump in the balance sheet capex; even if the government borrows off-budget, via infra bonds, it will certainly drive up the cost of capital and crowd out the private sector.

The Chief Economic Advisor made a good point saying foreign capital could be attracted since it is both cheap and available in plenty. But, for global corporations to be convinced about India, a lot more needs to be done, given many—such as oil explorer Cairn Energy—have burnt their fingers. So, regulation must be unbiased and irreversible, infrastructure markedly improved, and all contracts and court verdicts must be held sacrosanct.

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