The economy can sustain higher public investment


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The worrying factor could be found in the driving forces of GDP.

There is an oft-repeated comment that tries to lift up the sagging morale of an individual. In today’s media-based networking, the “Think Positive” advice has gained immense popularity. It has firmly attained its unique space in the managerial teachings in colleges, motivational discourses and Behavioural Economics.

To use this term while looking at the current state of the industry sounds devoid of any argument. But it brings back the immediate need of doing a critical analysis of the reasons for the decline and prodding us to strategise for getting over the crisis. And the implementation of these strategies has to be pursued with dedication and commitments.

One way of evaluating the economic performance is to compare the lowest growth periods and take lessons. During FY13 and FY14, India’s GDP grew by 5.5% and 6.4%, respectively which currently stands at 6.8%. During FY15 and FY19, India could achieve an average GDP growth exceeding 7.5%. These two low growth years had agricultural GVA growing by an average 3.5% against FY19 growth of 2.9%. Agriculture despite weakening linkages had a pulling down impact on industry and therefore the average industrial growth measured in terms of GVA came down to 3.5% in those years against the current growth of 6.9%.

The manufacturing sector in those low growth years had on average clocked 5.3% growth against the FY19 GVA growth figure of 6.9%. Although the services sector performed nearly at the same rate during then and now, one component, namely, public administration and defence has currently performed more than double compared to previous low growth periods. Thus, India is performing better now compared to the past low growth years with respect to some important parameters.

The worrying factor could be found in the driving forces of GDP. Being a consumption-led economy that accounts for a share of more than 59% of GDP against the average share of 56.3% in the past low growth periods, the reliance on Gross Capital Formation (proxy for investment) has sharply fallen. From an average ratio of GCF at 33.8% of GDP in the low growth periods, India could achieve only 29.3% ratio in FY19. The saving-investment gap which was an average 4.5% of GDP in the past (thanks to a higher saving ratio of around 34.3% of GDP that has since come down to 30.5%) resulted in a higher fiscal deficit of average 4.7% of GDP.

A declining investment ratio required a lower saving rate and has apparently saved the country from entering into a higher fiscal deficit, but added to the massive infrastructure deficits in all these years. It is to be noted that saving of household sector as a percentage of GDP has gone down from an average 23% of GDP in the past to 17.2% in FY19 with total private sector saving (private corporate sector and the household sector) has dropped down by nearly 5% of GDP.

The financial saving by the household sector has gone up, while the saving in physical assets has come down sharply which is the reason for demand stagnation for the consumer durable sector. Further the exports (all commodities) that grew at an annual average 24.5% in the past periods is currently hovering at 19.7% only. However, higher growth in exports of manufactured products (exceeding 7% from an average negligible rate in the past) is encouraging.

Similarly, the machinery export growing at an annual average rate of 4% is currently growing at 4.5 times the past rate. Fortunately for the country, the crude oil imports have declined due to price effect and conscious regulations have made import of gold imports to come down as a result of which India’s CAD at 0.7% of GDP by fourth quarter of FY19 looks comfortable. The growth rate of total imports from an annual average of 31.3% in low growth periods has currently come down to 23.6%, thanks to the indigenisation drive by the government in defence, power, steel, machineries, among others.

The positives are low inflation rate (WPI in June 2019: 2.02%), CAD (0.7% in fourth quarter of FY19) FE reserve ($429.6 billion as on July 26, 2019), IIP in infrastructure and construction segment (7.5% in FY19 and 6.4% in first two months of the current fiscal) and GVA in construction at 8.7% in FY19, repo rate at 5.75%.

Investment ratio must be enhanced at the cost of fiscal deficits as investment needs of the mega projects — Bharatmala, Setu Bharatam, Sagarmala, DFC, Piped supply of clean drinking water under Jal Shakti, PMAY-U&G, Irrigation schemes — are enormous and budgetary provisions are limited. The strong fundamentals of the economy can sustain a higher saving investment gap along with a higher export component.

Steel suppliers added inventory of around 2 MT at the end of June 2019 and suffered EBITDA losses as prices have come down by around 15% in the past 5 months. Steel inventory in specific sizes and grades can be passed on to the mega project authorities and their procurement cells/executing agencies as they need urgent supply at various locations.

An anticipated flow of fresh investment can do wonders at this stage, even prompting the fence sitters to jump into the fray.


Written by Loknath Das