Economic Survey 2014-15 Part 2

5)The government’s stalled projects are predominantly in infrastructure.Unfavourable market conditions(and not regulatory clearances) are stalling a large number of projects in private sector, and in contrast, regulatory reasons explain bulk of stalling in the public sector.Stalling of projects is severely affecting the balance sheets of corporate sector and PSBs,completing a vicious circle,characterized by an investment slowdown.The biggest lesson from stalled projects situation is that perhaps morethan a run-up problem(over exuberant and misdirected private investment), we face a clean-up problem(bankruptcy laws, asset restructuring etc).

6)An important policy lesson:India needs to tread the path of investment-driven growth(from consumption driven strategy). But highly leveraged corporate balance sheets and a banking system under severe stress suggest that this will prove challenging. Against this backdrop, public investment may need to be augmented to recreate an environment to crowd-in private sector investment.

7)The challenges in banking system fall into two categories: policy and structure.The policy challenge relates to financial repression. Financial repression on the asset side of balance sheet is created by SLR requirement  that forces banks to hold government securities, and Priority Sector Lending that forces resource deployment in less than fully efficient ways. Financial repression on liability side has arisen from high inflation, leading to negative real interest rates and a sharp reduction in households’ financial savings.The structural problems relate to competition and ownership i.e. lack of competition, reflected in private sector banks’ inability to increase their presence.The four key policy recommendations are is in the form of four D’s:deregulate ( in relation to financial repression),differentiate(within the PSBs), diversify(within and outside banking) and disinter( to create more efficient exit)

8) Household savings continue to be the largest contributor to gross capital formation. Household savings have two components:financial and physical, where the later does not lend itself easily to financial intermediation in the economy. The contribution of physical assets to household savings has stood stubbornly above 60 percent all through the last decade.