“In India investment has lagged resource availability,” says economist Ashima Goyal.
India can have resources available without investment keeping pace. Better financial intermediation moves more savings into productive investment. As investment raises incomes, savings rise too, enlarging the pool available for further investment. The same pool of savings can support very different investment outcomes depending on how effectively finance reaches productive projects. Goyal also calls for closer examination of which strategic sectors are compelling and feasible.
Defence, semiconductors and research and development can require years of spending before returns arrive. Goyal points to the “patient development of many components”, alongside capability across sectors and diversity in demand, global sourcing, production and finance. Those projects need finance over a longer horizon.
“An environment of stability, predictability and low volatility is required,” she says.
An investor committing money for years has to price the uncertainty carried through those years. The risk premium is the additional return demanded for bearing that uncertainty. When the premium rises, financing becomes more expensive even though the underlying project may be unchanged.
Goyal says commitment and policy predictability reduce risk for private investment. Those features are present in India. Confidence in policy’s ability to counter the external shocks facing the economy remains weaker, she says, although recent success in managing such shocks should strengthen that confidence.
Credibly countering shocks and smoothing asset-price volatility can lower risk premia and the mark-ups charged over policy interest rates. Sustaining inflation within the target band can help keep the policy repo rate lower. Both reduce borrowing costs. For projects with long gestation periods, those costs can materially affect viability.
Goyal describes India’s financial sector as well diversified and regulated, while the debt market remains relatively under-developed. Debt is one source of patient capital. A deeper debt market would expand long-duration financing for infrastructure, research and development and other investments whose returns take time to emerge. The maturity of finance matters where projects absorb capital for years.
Finance can also become harder to secure when credible information is missing, spillovers are not priced in and risk is over-priced.
A project may create value beyond the return captured by the investing firm. That wider economic benefit may therefore be only partly visible in the private investment calculation. Weak information adds uncertainty. Over-priced risk raises financing costs. An investment can consequently create wider value while still struggling to attract finance on workable terms.
Goyal sees a role here for public-private partnerships and institutions such as development banks. Public funds can reduce private-sector risk and bring in more private finance, with risk “allocated to parties best able to bear it”.
Support is most useful when it reduces a specific risk that is holding back finance and allows more private capital to participate. Used well, public money improves the financing conditions around the investment and helps mobilise additional private capital.
Goyal’s fiscal argument is equally focused on where capital goes. She wants the Centre and the states to move towards the “golden rule”, under which borrowing is used for investment. She couples that with greater efficiency in public investment and more leverage from the funds committed.
Goyal also warns that implementation can lag or be flawed. Good corporate governance and execution ability remain essential.
Capital must last as long as capability takes to build.
For projects that take years to mature, macroeconomic credibility and financial depth are not background conditions. They help determine what it costs to keep capital committed until the underlying capability is built.
