The Reserve Bank of India (RBI) is pressing for the need of higher public investment in the infrastructure sector to stimulate growth. It has called for rationalisation of government expenditure in certain sectors which, instead of encouraging private investment, crowds it out.
The central bank in its annual 'Report on Currency and Finance' stated: "The alternative of raising public sector capital expenditure in manufacturing sector crowds out private investment. It is only the public sector capital expenditure in infrastructure that crowds in private investment."
According to the RBI findings, "an increase of 10 per cent in government manufacturing reduces private investment by more than one per cent with a one-year lag". These findings support the view that public investment in manufacturing utilises scarce resources, which would otherwise have been available to the private sector. Further, the report states that the output through public investment would also be competing with that of the private sector.
The central bank further added that the fiscal deficit should also be kept under control as otherwise the private sector investment could be affected. The report highlights: "There is, therefore the need for restructuring of the composition of government expenditure to contain the fiscal deficit for the beneficial effect of the government's infrastructure investment to be realised."
The RBI findings show that a 10 per cent rise in government investment in infrastructure induces a three per cent growth in private investment. "The crowding-in of private investment suggests that the public sector infrastructure investment may be increasing the productivity of the capital of the economy, which by raising domestic output attracts higher private investment".
