There is skepticism about the public sector investment for growth in GDP. The Debt to GDP ratio has gone up to 81% with GDP Growth at around 7.4%. Higher Debt has kept the effective interest high inspite of RBI lowering benchmark rates. The borrowings by both Central and State Governments has crowded out the credit available in the market. Some analysts are worried about the limitations of growth in borrowings. This calls for greater analysis.

The Government Accounts are prepared on Cash Basis. This means that there is no differentiator between Capital and Revenue Expenditure. The expenditure in infrastructure is a capital expenditure and results from it take a longer period to fructify. Improved consumer behavior and even education standards in smaller towns  is the result of better connectivity. This also improves GST as well as direct tax collection. But there is always a time lag. 1st it takes time to complete an infrastructure project, Next it takes time for the infrastructure to really noticed and consumed by the public. Our Country has still lot of areas with poor connectivity and travel time between any two important destinations are still high. There is no option of slowing down the spending on infrastructure.

The other part of the problem is high borrowings. The Government need funds for spending. A large part of Government assets are locked up in PSUs. If Capital Expenditure of the Government is routed through PSUs, which again can be funded by selling the equity of these PSUs to public. This will reduce the overall borrowings of the Government. Listing of these entities will make them more accountable to public too. The Large PSUs like Coal India, NTPC have large number of subsidiaries. If they offer the shares of these subsidiaries to Public, they can raise resources for expansion or pay higher dividend to Government. This will reduce the need for higher borrowings.

Recently, Coal India has made a public issue for one of its subsidiary, Bharat Coking Coal Limited with listing of CMPDI in pipeline during the current year. It has also decided to list two more subsidiaries, Mahanadi Coalfields Limited and South-Eastern Coalfields Limited in coming year. Similar steps an be taken up by NTPC. HAL which requires huge capital for ramping up its production capacity can also raise equity from the markets and even form joint ventures with Private entities for carrying out specific projects.

This will reduce the pressure on debt market and reduce the interest rates in real market. Only issue is, whether the markets absorb large number of equity issuances or it may crowd out the private sector. With less debt issuance, there will be improved liquidity in the market and the ratio of equity investments by institutions like insurance and pension funds with long-term maturity liability. Things will stabilize in long-term. Even now, there is enough liquidity to absorb IPOs as can be seen from large oversubscriptions.

With better Debt-GDP ratio, even the foreign capital will start flowing. We may still see GDP growth on the basis of infrastructure expenditure already made.