India can thank its state leaders, rather than the central government, for its 7% plus GDP.
State administrations raised spending on roads, ports and power plants by 29 percent in April to July, according to data from the national auditor. A 1 percent increase in expenditure by states leads to a 0.11 percent lift in gross domestic product compared with a 0.04 percent boost from federal investment, a central bank study showed in 2013.
Spending by Prime Minister Narendra Modi’s administration fell 33.7% during the period, partly because he’s channelling money toward higher civil servant salaries that took effect last month.
The efforts could still prove a boon to Modi, by improving the nation’s overall economic record as he races to create jobs before a re-election contest due in 2019.
“State governments are likely to invest in smaller projects with greater focus that also have smaller gestational lags and fewer chances of getting stalled,” said Jay Shankar, chief economist at Religare Capital Markets Ltd. in New Delhi, who’s studied the trend. “Although we have not yet been able to draw conclusions on its implications for job creation, it is intuitive to assume that such smaller projects of the states would be more labour intensive leading to, among other things, greater spending multipliers vis-à-vis that of the Centre.”
The state of Maharashtra, home to India’s financial capital Mumbai, sold 10-year notes at a cut-off yield of 7.16 percent at an auction Tuesday, 21 basis points lower than what it paid for the same tenure a fortnight earlier. Borrowing costs for Haryana, Uttar Pradesh and Madhya Pradesh declined by 17 to 22 basis points, compared with a six basis point drop in the benchmark sovereign 10-year yield in the period.
States planned to raise as much as Rs.750 billion ($11.3 billion) in the quarter ending 30 September.
Nomura Holdings Inc. predicts overall India GDP will increase only slightly to 7.3% in the year through March 2017 from 7.2% in the previous 12 months. It forecasts a pick up to 7.7% the following fiscal year as public capital expenditure will gain traction.
Though private capital expenditure pledged for the current fiscal year is less than half that estimated for the previous year, revival of stalled projects and the government’s steps to make it easier to do business give “reasons to be optimistic,” the Reserve Bank of India said in a separate study published this month.
The pay increase for state employees may kick-start demand and a good monsoon after two back-to-back droughts will also boost farm output and incomes, the report stated. “These factors may help in turning around the investment outlook in the near future.”
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