India's barriers to financing

The Indian government does not have sufficient means to finance the country's transformation, for 2014-15, public debt still stood at 66.3% of GDP and the combined government and public-sector deficit was estimated at 6.4% of GDP, while the central government deficit was a mere 4.1% of GDP. 

Even though commodity prices helped to reduce substantially the government's rigid spending (via reductions in its subsidies), revenues remain well below the level they would need to be at to cover all investment spending. The government hopes to finance its development (including its infrastructure) in particular through private-sector borrowing and foreign direct investment. Yet its domestic sources of financing are limited at present. 

The budget deficit and overhaul of public debt still drain off 27% of bank liquidity, and, secondly, banks are facing a significant deterioration in their asset quality. Doubtful and restructured loans are now estimated to account for 11.3% of outstanding loans. Provisioning for these at-risk loans remains very inadequate. 

At the public banks (accounting for 75% of banking assets), at-risk loans (net of provisions) stand at close to 30% of their capital, notes BNP Paribas. At the same time, Indian banks and especially public banks have substantial capital requirements if they are to meet the new regulatory standards. The banks' refinancing needs also act as a barrier to the distribution of lending to businesses and thus to economic development.

Mr Modi's arrival indeed attracted inflows of foreign capital. Incoming FDI came to 1.7% in 2014 (2.2% in Q2 2015), representing a rise of 0.4 points of GDP compared with 2012 and 2013. Yet this greater confidence among investors is by no means sufficient. In addition, foreign investments are still concentrated in the service, rather than the industrial sector.