India’s troubling savings and investment trajectory
Let us raise a toast to the new goods and services tax (GST). As has been widely stated, it will “create a national market, enhance the ease of doing business, lead to greater productivity and efficiency, as also improved tax compliance”. It will also raise India’s overall growth rate on a sustainable basis. However, the achievement of such growth rests on the assumption of a smooth transition to a GST-compliant regime, which may be questionable given the large proportion of manufacturing and service enterprises within the micro, small and medium enterprise (MSME) sector.
More importantly, the road to growth still rests on achieving certain important milestones, viz. boosting private savings and private investment. This is where the disconnect arises.
Both private savings and private investment seem to have dipped in the last year in particular. While the rate of gross domestic savings (at current prices) has fallen from 34.6% of gross domestic product (GDP) in 2011-12 to 32.2% in 2015-16, it is investment which poses a greater problem. Given the latter’s current state, the government may well be unable to make much headway in its ambitious growth plans.
Latest Reserve Bank of India data suggests that credit offtake by key sectors in the economy has been floundering. Food credit, i.e. credit provided by commercial banks to the Food Corporation of India and state government agencies for procuring foodgrains from farmers, has fallen significantly from Rs1.03 trillion in March 2016 to Rs40,000 crore in March 2017.
More importantly, non-food credit growth has halved to 4.5% in April 2016-17, from 8.4% over the period April 2015-16. A decomposition of such non-food credit reveals that while agriculture and services have experienced declines in growth rate, industrial credit offtake has actually decelerated.
Thus, growth of bank loans to the agriculture and allied sectors reduced from 15.3% over April 2015-2016 to 7.4% over April 2016-17, while organized credit offtake by the industrial sector witnessed a deceleration from 0.1% growth in April 2015-16 to -1.4% over 2016-17. Service sector credit offtake growth more than halved from 10.1% to 4.1% over the same period.
With service constituting about 66.1% of gross value added growth in India, it is currently a key driver of India’s growth. Credit availability for the sector’s growth is thus clearly a matter of concern. It appears that except for “wholesale trade” and “other services”, all other services have clearly experienced a decline in bank credit offtake.
The next question which arises is: Which are the industrial sectors which account for such reduced credit offtake? And why? Core industrial sectors, including mining and quarrying, textiles, fertilizers, basic metal and metal products such as iron and steel and most importantly, infrastructure, have all witnessed declining credit offtake during the period April 2016 to March 2017. Infrastructure sectors like telecommunications and roads have experienced significant decline in credit offtake.
Such lower credit offtake needs to be juxtaposed against trends in business sentiments to understand what really is happening to investment, and the reasons thereof. The “animal spirits” required for a vibrant investment climate seem to be grossly missing, as seen from the Quarterly Industrial Outlook Survey. While the survey presents a picture of better industrial outlook when compared to 2015-16, that picture appears completely different when compared to 2010-11 or even 2014-15, the year of the new government and the launch of the “Make in India” programme. The Business Expectations Index in Q4 2015-16, at 106, was only 0.3 point more than in 2014-15, and lower than the level of 120 achieved in 2010-11.
Industry also seems to expect further contraction in both production and employment going forward. The expectations regarding increase in order books, as also employment outlook, have shown contractionary trends compared to both 2010-11 and 2014-15.
The MSME sector contributes about 45% of the manufacturing sector output in India. The credit offtake by the MSME sector has continued to remain in the negative zone. This can be partly explained with reference to their lack of creditworthiness for institutional credit.
However, such lack of credit offtake should also be understood with reference to the business sentiments, especially within the micro sector, which have fared worse over the years. Thus, even in June 2016, a relatively normal quarter, business sentiments for production by micro enterprises contracted, after following downward trends since Q4 2013-14. Micro enterprises exhibited contractionary patterns with regard to other demand indicators as well, such as capacity utilization and order books, as also pessimistic sentiments regarding availability of finance.
In sum, while the government needs to be lauded for its present efforts at implementing the GST, and the latter will help in improving the ease of doing business, both RBI and the government will need to pay greater attention to improving the investment climate in the country, especially for the MSME sector. The government’s best intentions to “crowd in” private investment through larger budgetary outlays for key sectors, including infrastructure, will be nullified if the private sector fails to bite. The moral of the story is clear: The road to growth lies through raising private savings and investment.
Tulsi Jayakumar is professor of economics at the SP Jain Institute of Management and Research, Mumbai.
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