Context: Indian economy has seen persistent decline or stagnation in investment rates in the past decade despite the soaring of stock markets and the narrative of V shaped recovery. This article analyses key challenges and suggestions for improving investment rates in India.
Gross Fixed Capital Formation (GFCF)
- Gross fixed capital formation (GFCF), also called "investment", is defined as the acquisition of produced assets (including purchases of second-hand assets), including the production of such assets by producers for their own use, minus disposals.
- The relevant assets relate to assets that are intended for use in the production of other goods and services for a period of more than a year.
- The term "produced assets" means that only those assets that come into existence as a result of a production process are included. It therefore does not include, for example, the purchase of land and natural resources.
- GFCF at current prices and current PPPs in US dollars, and annual growth rates of GFCF at constant prices, as well as quarterly data for percentage change over previous period and percentage change over same period last year.
Overall Investment in India is broken into three components:
- GFCF by Government & Public Sector
- GFCF by Private Corporations
- GFCF by Household Sector: Includes personal investment in dwellings etc., estimated investments by unregistered MSMEs and informal sector.
There has been continuing decline or stagnation in the overall investment in the Indian economy in the past decade. Investments rates measured using GFCF has declined from close to 34% in 2011-12 to between 27 and 29%.
Analysis of trends of investment in the last decade in the Indian Economy
- Dominance of Household Sector in overall investments in India: Between the period of 2011-12 to 2013-14, household sector accounted for 42.6% of of average of total fixed investment. This declined to average of 39.5% during 2019-20 to 2021-22. Despite this slight decline, this data suggests that the household sector accounts for around 2/5th of total investment. This highlights:
- Continuing importance of informal activity in Indian economy not only in employment but also in determining aggregate investment and economic activity.
- Relatively moderate rise in the housing prices and continued increase in bank credit for housing.
- Continuing importance of public and government investments: There has been a persistent role of government and public investment in contributing to overall investment. Total public investment has risen from accounting for 21.6 in 2011-14 period. This has gone up to 23.4% in 2019-22 period.
Enhanced public investments has been in the following ways:
- Grants to States for capital asset creation.
- Enhanced investments by CPSEs
- Union government capex
- Government has sped work on infrastructure projects that have stalled due to construction delays, inefficient administrative processes, inadequate financing and legal and land issues.
The enhanced investment by the public sector targets to the needs of population at the bottom of pyramid and has further addressed supply side deficiencies with better infrastructure.
- Over-emphasis on private corporate sector investments: The private sector which gets much attention from government policy making only accounts for one-third of total investment on an average in the last 10 years. Despite various incentives, private corporate investment has largely stagnated between 2015-18.
- Steps taken to promote private corporate sector investments:
- Sharp reduction in corporate taxes: Government sharply reduced corporate income tax rates which is estimated to have a revenue loss of around 2% of GDP for exchequer. However, this incentive also did not result in stimulating private corporate investments.
- Trends in real investments by major sectors:
- Dominance of real estate sector in total investment: The real estate sector accounted for 25.5 of total investment in 2011-12 and then fell to 18.3% in 2021-22.
- Uptick in investment in the manufacturing sector, which is a positive development given the positive multiplier impact of manufacturing sector on overall economic growth.
- Investment in construction grew between 2014-18 period. However, stagnated after this period.
- Investment in transport, storage and communication increased in the period between 2017-20, but otherwise has been in line with overall GDP growth.
Reasons for decline in the investment rates in the past decade:
- Inequality as a reason for slowdown in investments: As the stimulus and fruits of economic expansion accrue to a relatively small part of Indian population, there has lack or minor improvement in the material conditions of majority population. This means that a large domestic market for mass consumption goods has not developed as much as it could have. This is reflected in the following examples:
- Decline in two-wheeler sales even as demand for luxury passenger vehicles has increased.
- Increased demand for foreign education in the Indian elite.
- Increased consumption of imported goods.
However, the enhanced consumption of middle and rich classes is of lower significance as it is difficult for domestic producers to establish dominant market presence.
- Double balance sheet crisis: Indian economy saw very high investment rate in the first decade which was fuelled by excessive borrowing and over-optimism. In the period after 2013, however saw spike in bad loans for banks and distressed balance sheets of corporates leading to declining trend in investments in the corporate sector. However, with steps like reforms in governance of banks, recapitalisation etc. bank balance sheets have improved.
Green shoots in investments in Indian Economy
However, green shoots are visible in the investment trends in Indian economy evident from:
- Healthier balance sheets of corporate sector
- Reduced NPAs and greater credit disbursement for investment
- Robust growth in capital goods and infrastructure sector as highlighted by Index of Industrial Production.
- Enhanced capex by private non-financial companies
Way Forward for boosting investments
- Reducing inequality and ensuring sufficient incomes especially for bottom half of population. This will generate a dynamic mass market for goods and services produced in India and promote domestic investment.
- Focusing in enhancing demand of those at the bottom of pyramid by boosting salaries such as minimum wages etc.
- Incentivising investments and growth of the informal sector which any which ways contributes to overall investment rates.
- Mobilizing of resources for better investments from the banks.
- Boosting foreign direct investments