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Tuesday, Feb 05, 2002

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Public sector weathers investment famine

Harish Damodaran


THE public sector is often berated for being slothful, inefficient and, indeed, an anathema to the concept of liberalisation. But going by the Central Statistical Organisation's latest national income data, it is the public sector that is seemingly holding its ground even in an environment devoid of tangible investment activity or sentiment.

The early and mid-1990s was a period when private corporates went on a massive investment binge, buoyed by the optimism accompanying the initial burst of economic reforms. There was nothing that appeared to shackle their `animal spirits', including high project lending rates of 18-20 per cent.

Private corporate investment, as a share of gross domestic product (GDP), rose from 4.1 per cent in 1990-91 to 5.6 per cent in 1993-94, before peaking at 9.6 per cent in 1995-96. 1995-96 was also a landmark year, for it marked the first time that the organised private sector displaced the public sector as the dominant investor.

While in 1993-94, private corporate investment, at Rs 48,213 crore, stood below the Rs 70,834 crore invested by the public sector, the situation was reversed by 1995-96, with gross capital formation by private corporates (Rs 113,781 crore) exceeding the corresponding public investment figure of Rs 90,977 crore.

However, the subsequent years have seen the ratio of private corporate investment to GDP dip to 8.4 per cent in 1997-98, 6.6 per cent in 1999-2000 and 5.9 per cent last year. What is more, since 1999-2000, the public sector has re-emerged as the mainstay of investment, thereby re-claiming its `commanding heights' role in the economy.

Gross capital formation by private corporates has shrunk not only relative to GDP, but even in absolute terms, from Rs 1,27,304 crore in 1997-98 to Rs 1,23,022 crore in 2000-01. During the same period, public investment levels have gone up by over Rs 47,000 crore, touching Rs 1,48,106 crore last year (see Table).

The fact that the public sector has stepped up its investments since 1997-98, both in absolute terms as well as relative to GDP, is significant on two counts. Firstly, the absence of `sentiment' does not seem to have deterred the public sector from investing. The ongoing investments in development of highways or construction of city flyovers have clearly been independent of the general bleak outlook, which has dissuaded most corporates from embarking on major greenfield ventures or even expanding existing capacities.

Secondly, the higher public investment levels have come notwithstanding the public sector becoming a net dis-saver to the tune of Rs 34,479 crore in 2000-01 (-1.6 per cent of GDP), as against being a net saver of Rs 23,381 crore in 1997-98 (1.5 per cent of GDP).

This phenomenon of the public sector augmenting its capital outlays, even while emerging as a dis-saver, would be undesirable if it entailed a `crowding-out' of the private sector's access to financial savings of households. But had public sector borrowings been excessive, it would have pushed up overall interest rates to the detriment of corporates, which is certainly not the case.

Banks, on the contrary, are awash with liquidity and lending rates have never been as low as they are presently. That there is very little demand for funds outside the public sector is borne out by the fact that as on January 11, commercial banks were holding almost Rs 1,39,000 crore of Government securities in excess of their Statutory Liquidity Ratio (SLR) requirements.

Even with regard to public sector dis-savings, it may be pointed out that the root cause of this is the soaring revenue deficits of Government administrations and not the diminishing surpluses of public sector undertakings (PSU) per se.

While the dis-savings of administrations have risen from Rs 25,970 crore in 1993-94 to Rs 106,521 crore in 2000-01, there has been a corresponding increase in savings of PSUs and departmental enterprises from Rs 31,415 crore to Rs 72,042 crore.

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