An underperforming economy

The real problem lies in the inefficient use of investment capital to boost final output
Comment E-mail Print Share
First Published: Thu, Apr 25 2013. 07 35 PM IST
It is worth noting that investment in the economy has remained largely stable at around 35% in the past few years, although economic growth has been slackening. Photo: Priyanka Parashar/Mint
It is worth noting that investment in the economy has remained largely stable at around 35% in the past few years, although economic growth has been slackening. Photo: Priyanka Parashar/Mint
The Prime Minister’s Economic Advisory Council (PMEAC) in a recent report, Review of the Economy 2012-13, cited inefficient use of investment capital as a major reason holding back economic growth in the country. In particular, the report brings to attention a steep rise in the Incremental Capital Output Ratio (ICOR) which effectively means that investment in the economy is not being translated into growth in final GDP output.
The PMEAC has drawn particular attention to the number of power plants in the country that work below full capacity due to the lack of supplies, apart from the delay in the commissioning of a number of other projects, both of which contribute to a higher ICOR figure.
It is worth noting that investment in the economy has remained largely stable at around 35% in the past few years, although economic growth has been slackening. The predominant belief that falling investment is the major reason behind the current slowdown—which, in turn, has pushed the government on an overdrive to boost investment—should be challenged by this fact. The real problem lies in the inefficient use of investment capital to boost final output, which should naturally bring to scrutiny serious structural problems plaguing the economy.
The investment rate—a function of the structural efficiency of the economy—showing a stable trend despite structural problems may look counter-intuitive. But a look at the breakup of the economy’s investment rate should bring in clarity. As seen in the Economic Survey 2012-13, while investment rate as percentage of GDP has remained fairly stable, there’s been a drop in private sector investment—from 28.1% of GDP in 2007-08 to 24.9% in 2011-12.
Comparatively, the drop in public investment has been lower. While public investments may be less prone to fluctuations due to structural deficiencies, they are more prone to economic inefficiency owing to the very same structural deficiencies—thus explaining the rise in ICOR despite a stable overall investment rate.
The PMEAC may be right in blaming structural problems for the current slowdown. But it is important to be clear—in light of a stable investment rate—that the reflection of such structural problems on the ICOR is through drop in private investment, and relatively stable but inefficient public investment.
What explains the inefficiency of public investment? Tell us at views@livemint.com
Comment E-mail Print Share
First Published: Thu, Apr 25 2013. 07 35 PM IST
blog comments powered by Disqus
  • Thu, Dec 18 2014. 01 13 AM
  • Wed, Dec 10 2014. 05 37 PM
Subscribe |  Contact Us  |  mint Code  |  Privacy policy  |  Terms of Use  |  Advertising  |  Mint Apps  |  About HT Media  |  Jobs
Contact Us
Copyright © 2014 HT Media All Rights Reserved