Budget, investment and the economy

The Tk 2.5-trillion proposed national budget for fiscal year 2014-15 purports to achieve a growth rate of 7.3 per cent. It relies on deficit financing to the tune of 5.0 per cent of GDP (Gross Domestic Product), to be met by borrowing from the banking system, saving certificates and external sources. As usual, its various aspects came under criticism. These include growth target, investment projection, deficit and revenue realities etc.
Serious doubts have been raised as to whether the projected growth target can be achieved since investment activities, according to sceptics, remain constrained by political uncertainty.  Critics also got chance to capitalise on the Finance Minister's own statement that he assumes that there will prevail political stability.
Other critics argue that large-scale money laundering is impacting national investment efforts.   As regards the latter, we are of the opinion that we have had money laundering throughout history under dictatorship and democracy alike but not probably to the extent that does remarkably impair national investment efforts.   
Private investment reportedly fell as percentage of GDP for the second year in a row. In fiscal year 2013, private investment as a proportion of gross domestic product stood at 21.75, lower by a significant 0.75 per cent than the level achieved in the previous fiscal year. Half-yearly estimate for FY14 shows a further decline to the tune of 0.36 percentage points for the fiscal.
 It is additional public investment that succeeded in ensuring some marginal increment in the national investment effort, i.e., investment-GDP ratio, for the two latest fiscal years.
Given the background, let us deal with the issue of investment effort vis-a-vis political stability/uncertainty.
To start with, however, it will be necessary to do a brief stocktaking of the proposed budgetary measures as regards promotion of investment effort.  
Broadly, the government aims to resort to monetary policy, taxation and effective protection.
As regards monetary policy, the Finance Minister said, "Effective measures will be taken to cut interest rate for increasing credit flow and investment in the private sector."
In order to increase effective protection, it is proposed that duties on import of several raw materials will be reduced and duties on a number of finished products raised.
Duty cuts have been proposed on imports of raw materials for paper, glass, ceramic, rubber, furniture, paint, electric, and plastic industries.  Also supplementary duty will be imposed on import of bus tyres. There will be new duty on import of bicycle. Duties on import of 40 raw materials of pharmaceutical industry have been proposed to be cut.
The proposed budget also aims to provide tax holiday to industries that will be shifted from the cities.
Now, how does monetary policy impact investment behaviour in Bangladesh? According to statistical bulletins, we have the following information.
Investment effort almost stagnated between 2008 and 2010 despite there being no political uncertainty. Private investment fell as percentage of GDP in 2010 to 21.56 from 21.87 in 2009. In 2008, private investment was 21.69 per cent of GDP. That is, political certainty played no role to stop declining investment effort.
To improve matters, the Bangladesh Bank (BB) resorted to, among others, the following step:
"To help real economy sustain growth momentum … BB shall continue to maintain easy credit conditions in FY 10.  … Besides accommodating the public sector borrowing needs … BB's monetary programme will amply accommodate the credit needs of the private sector" (BB Monetary Policy Statement July-December, 2009).
Consequently, "output and investment activities in the economy paced up in FY11 rather faster and unanticipated, particularly in the second half as power supply shortages started easing.  … Imports remained output and growth oriented in FY11. Trade deficit began widening    … Remittance income started decelerating."  
In 2011, private investment rose by 0.58 per cent of GDP - the single highest rise in a decade. There occurred another 0.36 per cent rise in 2012.
But then inflation seemed to have gone out of control. The monetary authority began to make all-out efforts to bring inflation down to single digit.
Accordingly, "toward reining in credit growth, BB raised repo interest rates in four steps to totalling 225 basis points in FY11, besides raising CRR for banks by 50 basis points in December 10".
In 2013, private investment effort stood at 21.75, lower by 0.75 per cent than the previous year's level. Half-yearly data for fiscal year 2014 shows that there occurred further declines.
It may be noted that although the fiscal year 2013 was politically stable, there still occurred the largest decline in investment effort.
This narrative will nullify the political uncertainty theory that political uncertainty has played and will continue playing roles  not to let the economy turn vibrant to push it toward higher and higher growth paths.
Thus the observed spurt in private investment in FY2011 and FY 2012 can be thought as being outcome of both easy money and 'easy' electricity situation. In the same vein, the observed decline in private investment by 0.75 per cent of GDP in FY2013 is seen to be preceded by the BB's raising "repo interest rates in four steps to totaling 225 basis points in FY11, besides raising CRR for banks by 50 basis points in Dec 10". Besides 'easing' of electricity started disappearing with many euphoric 'quick-rentals' having exhausted their prowess.
Summing up, we find that the government in order to reverse decline in private investment proposes to reintroduce easy money policy in combination with measures to raise effective protection for some lines of to-be-set-up industries, which presumably are also selected on the basis of observed comparative advantage. These measures, in combination with the 'crowding-in' type of roles, specifically ones like the newly started Padma Bridge could, we suppose, succeed in raising national investment effort above the psychological cut of 30 per cent of GDP in the coming fiscal year.
The writer is professor at Dhaka School of Economics. ncnagcu@yahoo.com