New Delhi: Providing food for thought for economists and policymakers, a recent research report has said that the country’s investments in human capital and business are “weak” in comparison with the rising economic needs.
“India’s business investment and investment in human capital remain weak relative to the needs of a rapidly growing economy,” the report prepared by Deloitte Research said.
Further, the report added that inefficiencies in the nation’s labour and product markets resulting out of excessive regulations are inhibiting growth in the long-term.
Failure to enact reforms, improve fiscal discipline and invest sufficiently in human capital and infrastructure, could ultimately result in slower growth, it noted.
The study titled ‘Global Economic Outlook 2008’ said that majority of the foreign capital are in the form of portfolio rather than direct investment, which creates a worrisome scenario where money can flow out easily, the study noted.
In recent months, strong inflow of foreign investments had pushed the stock market and property prices upwards.
This sets the stage for potential financial market turmoil if and when the emerging market equity bubble bursts, the report said.
Another problem is the government’s large budget deficit which accounts for nearly four per cent of the GDP.
Consequently, a portion of the domestic savings is used by the government, thereby increasing the cost of capital.
According to the report, rising portfolio investment and budget deficit have resulted in weak investments in human capital and business as compared to the country’s economic needs.
However, robust service and manufacturing sectors have helped in achieving strong economic growth.
The study said the only thing likely to hold back growth in service sector is supply constraint on human capital.
On the other hand, a robust manufacturing sector is particularly welcome since the country cannot maintain breakneck growth based on business services alone, it pointed out.
Pointing out that domestic demand rather than export demand has helped growth in the manufacturing sector, the report said manufacturing would be critical in improving the lot of the relatively uneducated masses.
Meanwhile, increased liquidity in the economy has been partially caused by large capital inflow from overseas which in turn has propelled the domestic demand.
Unfortunately, the net effect has been the currency appreciation, which would damage the competitiveness of exports, the study noted.
Ironically, the government has to balance the possibility of inflation and excessive constriction of credit, which could burst the property price bubble. This could in turn crimp domestic demand.
That would damage the nascent expansion of the manufacturing sector, the report concluded.