Public Investment in India

Context: Sluggish global growth should prompt India to look inward at augmenting public investment to spur demand. Introduction:

• Hyperglabalisation has been used to describe the dramatic increase in international trade witnessed for about a decade and a half from early 1990s up to the global financial crisis of 2008.

What is Public Investment? Public investment is investment by government

• To provide basic resources such as water, sanitation which private sector can’t deliver. This leads to higher productivity and better living Standard.
• To boost growth and provide infrastructure to private sector for more investment.
• Public investment shapes choices about where people live and work, influences the nature and location of private investment, and affects quality of life.
• Public investment can boost growth and provide the right infrastructure to promote private investment.
• Poor investment choices wastes resources erode public trust and limit growth opportunities.

Statistics related to Public Investment:

• Public investments by central, state, local government and PSEs saw 21 per cent rise in 2015-16, record growth in last two decades, while private investments (households and corporate) contracted 1.4 per cent year-on-year, the worst performance
• Public investment represents 15% of total investment (public and private) in the OECD.
• Public investment represents 3% of GDP in the OECD
• 50% of public investment in the OECD countries is directed to education and economic affairs.
• Public investment dropped by almost 8% annually since 2010 on average in the OECD.

Problems of public investment:

• The impact of public investment on growth depends significantly on the quality of governance.
• Local governments lack the awareness on how to make the best use of investments.
• National, regional and local governments will need to invest more efficiently.
• Agricultural performance has been poor since the boom of the 2003-08 phases and the pace of infrastructure growth by public investment has slowed.

Importance of public investment:

• In India, rapid growth is underpinned by a substantial increase in investment, which now stands at around one-third of GDP. Much of this increase has come from private sources, reflecting gradual relaxation of the shackles on the business sector since the early 1980s.

But the public sector continues to play an important role.

• Public investment is essential to boost growth in Asia’s third-largest economy when private investment remains weak
• Public investment can enhance an economy’s productivity for a substantial period of time, as it clearly done in Ethopia.
• It can also catalyze private investment, and there is some evidence that this has happened in India in recent years.
• The potential benefits of public investment are not limited to developing countries. In fact, today it may be the advanced economies of North America and Western Europe that stand to gain the most from ramping up domestic public investment.
• Public investment in infrastructure like roads, dams, power plants, etc is an indispensable driver of economic growth has always held powerful sway over the minds of policymakers in poor countries.
• In Africa, Ethiopia is the most important success story of the past decade. Its economy has grown at an average annual rate exceeding 10% since 2004, which has translated into significant poverty reduction and improved health outcomes.

Private investment:

• Private investment has played a central role in accelerating growth in India since the mid-1980s when India began liberalizing its economy.
• Private investment has slumped in the last three years leading to a slowdown in economic growth and its revival is vital for accelerating India’s growth rate on a sustained basis.
• India also has a huge public infrastructure deficit and declining public investment.
• The banking sector faces a huge problem of non-performing loans (NPLs), some of which emanate from stalled infrastructure projects. As a result, credit to the private sector has slowed down hurting private investment. Corporate investment peaked in 2007-08 at around private investment is based on expectations of profits

Conclusion: The role of public investment is critical as it helps build public capital needed for the provision of basic services but it also helps draw-in more private investment.

Public investment must be increased and much of the increase must come from investment by the state and central government – not just by the public sector undertakings. In a situation when private investment is not forthcoming, public investment has a role only as a source of aggregate demand but also as catalyst. Recognising the diminished tempo of globalization, India’s economic policymakers must address the growth of the domestic market, which is the demand for goods and services emanating from within the country.