Private sector investment can boost sagging economy: Crisil

The sagging economic growth can be given a boost if the private sector increases its investment as the government is not in a position to increase public spending, given its constraints, says rating agency Crisil.

The private sector, accounting for three-fourths of GDP, will have to script the economic turnaround by reviving investments and raising its contribution to overall growth, Crisil said in its report ‘Why is it critical to revive the private sector?’

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The agency notes that in the two decades since 1990, the share of the public sector in GDP growth remained stagnant at 6 percent, whereas private sector GDP growth went up to 7.7 percent in the 2000s from 5.7 percent in the previous decade.

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“The private sector’s performance during the high growth phase from 2004-05 to 2007-08 was even more impressive, as it logged 9.7 percent GDP growth per year. Private corporate investments, too, had surged to 17.3 percent of GDP from 10.3 percent of GDP during this period,” Crisil said.

During the global financial crisis, investment by the private corporate sector slumped to 11.3 percent of GDP in the crisis year 2008-09 from 17.3 percent in the preceding year, it added.

“If India came out largely unscathed from the effects of the financial crisis, it was mainly due to the impetus from the public sector. During 2008-09 to 2009-10, private sector GDP growth had slipped sharply to 6 percent from its pre-crisis levels of 9.7 percent per year.

“Without a robust 12.3 percent growth in public sector GDP on the back of increased government spending, overall GDP growth would have averaged 6.2 percent and not 7.6 percent during these two years,” Crisil chief economist Dharmakirti Joshi said.

However, the agency believes that if the current economic downturn continues, the public sector will be unable to perform a similar rescue act. The government can enable a revival by pushing through the next level of economic reforms and removing policy bottle necks.

This is all the more imperative because, unlike during the 2008 crisis, the public sector is not in a position to provide an impetus to growth due to the government’s fiscal constraints, it noted. “The weak fiscal position of the government constrains it from raising public sector GDP through increased spending.

This is evident from the decline in public sector GDP growth to 6.5 percent in 2010-11 from 14.5 percent in the previous year.“Consequently, the sustainable upside to growth will be largely shaped by the revival of private sector sentiment and investments,” Crisil Managing Director & Chief Executive Roopa Kudva said.

The agency believes that the government will have to play the role of an enabler through measures such as removal of policy logjams, speeding up project clearances, and adding a fresh dose of economic reforms, to spur private sector investment.

PTI