DEEPTI AGARWAL

SYBA-G 3268

Topic: Investment Projects by Ownership, Government and

Private Sector

INTRODUCTION:
The path of economic reforms in India, particularly since 1991, has been characterised by a
well-defined policy and direction. The continuity of commitment to reforms over the period
is, in itself, a significant contribution to the development of a stable, long-run investment
climate in the country. Long-term investors, like those in infrastructure sectors, would
evaluate the attractiveness of investment on the basis of three kinds of risk – policy
risk, regulatory risk and business risk. One of the key focus areas of our reforms is the
redefinition of the respective roles of the public and private sectors in infrastructure
and, within the private sector, the contribution of foreign investment.

In response to this crisis, the Government implemented a programme of structural reforms,

aimed at stabilising the economy and promoting reliance on market mechanisms, broadly
referred to as ‘liberalisation’. The main components of the structural reforms programme
were exchange and trade liberalisation; financial sector reforms and control of the budget
deficit; inflation and money supply. A great deal of significance was placed on promotion of
foreign technology transfers and foreign investment in key areas, as well as, the further
development of the private sector.

The relationship between government spending and aggregates such as output, employment,
and prices has been the subject of many theoretical and empirical studies. Recently, however,
interest has shifted to government spending on the provision of public capital (measured as
fixed, non-residential government capital) and various indicators of economic performance.
Hence, government spending is now recognized to extend beyond the traditional view of
strictly purchasing goods and services: The provision of public infrastructure has become an
integral component.
We find a negative correlation between the public investment and private investment. As
private investment activity enhances future growth of real income, these statistical results
confirm that public policy has permanent effects on real output. The empirical results confirm
that public policy has permanent effects on real output. The empirical results indicate that
private sector equipment investment is inversely related to government investment spending
and directly related to the existing public capital stock. Also, private equipment investment is
much more sensitive to public provision of capital than either structures investment. These
findings suggest that public infrastructure has an overall stimulative effect on private
investment activity in the India.

It is observed that the crowding out effect of public investment on private investment has
dampened during the post-liberalization period. The results also reveal that a “market
friendly” incumbent and an increase in foreign direct investment dampen the magnitude of
the crowding out effect of public investment. Formal tests were conducted to examine
whether the crowding out effect was driven by political uncertainty and political business
cycle channels but no evidence for the same is found.

New project announcements in India plunged to a 16-year low in the just-ended June quarter,
latest data from the project-tracking database of the Centre for Monitoring Indian Economy
(CMIE) shows. As the country remained under lockdown for most of this period to combat
covid-19, economic activity dropped sharply. The spirits of India’s entrepreneurs also seems
to have dried up, the latest data suggests.

Private investments in India have been rather low for a while, and the decline in economic
activity seems to have dampened sentiments further. Government-led investment projects,
which had seen their share rise over the past few years, also collapsed in the latest quarter.
The drop was particularly sharp for state governments, which have been finding it hard to
finance even routine expenditures.

State governments announced new investments worth a mere Rs. 937 crores, the lowest level
on record since CMIE started compiling the data in 1995. Investments by state governments
have been a key driver of public sector investments but in the June-ended quarter, they
accounted for only 4 percent of the value of total government projects announced.
Together, public and private sector companies announced new projects worth Rs. 56,087
crores in the quarter ending June 2020, levels last recorded in June 2004. The value of new
projects is half of what it was in the year-ago period, and 83 percent lower compared to the
March-ended quarter. These numbers are provisional and may be revised later.

New foreign investment plans have also dried up as the pandemic worsens the global trade
and investment climate. Compared to the March-ended quarter, foreign private capital
expenditures declined by 95 percent, and compared to the year-ago period, by 70 percent.

However, the mix of investments is skewed towards a few mega projects. Two energy sector
projects, one private (Veeraballi Pumped Storage Power Project) and one by the central
government (West Bengal & Jharkhand Floating Solar Power Project) constitute a major
share of the new capex announced in the June-ended quarter.

All sectors saw a drop in project announcements, the data shows. Compared to year-ago
levels, the decline was steepest for construction sector projects, down by 93 percent, whereas
electricity projects noted an uptick.

CONCLUSION:

There is recognition that the private sector, including foreign investors, has a significant role
to play in raising the standards of infrastructure services in the country. The recognition of
the private sector’s role brings with it the need to set up efficient regulatory structures, which
are capable of balancing the interests of consumers and providers, within the overall context
of stated policy objectives. The undeniable fact is that the large percentage of young people
in India’s population guarantees that demand for many products, including that for
infrastructure services, will continue to grow for a long time to come. Let alone future
generations, India’s commitments to its current citizens to offer better standards of
living, through expanded opportunities for employment and productivity growth, will ensure
the emergence of the right mix of policy and regulation sooner, rather than later. 

In the post-liberalisation regime, the Government has reduced its role of a direct investor and
has taken on the mantle of providing an ‘enabling’ environment for the private sector. The
package of economic reforms introduced through the nineties, has led to a significant
improvement in the investment climate. Besides, the Government has taken a series of steps
to improve the quality of governance and the quantum and quality of infrastructure. Both
should translate into stronger flows of private investment and help the economy move on to a
higher growth trajectory. Besides this, the Government remains a key participant in the social
sector where private involvement is often found to be inadequate.