India’s investment rate needs a broad bump-up
2 min read 04 Sep 2022, 09:55 PM ISTCapital formation is on an uptick amid disappointing GDP growth, but it remains weak and way too dependent on central spending. We need private investors and states to chip in
PremiumThe gross domestic product (GDP) numbers presented for the first quarter of financial year 2022-23 have turned out to be slightly below expectations, with real growth at 13.5% belying street predictions as well as Reserve Bank of India projections. Investment activity in the economy, though, is one bright spot within the disappointing haze. Gross fixed capital formation (GFCF), as a proportion of GDP, rose to 29.2% in the three months till end-June, compared with 28.2% in the same quarter the previous year. Even otherwise, GFCF grew by more than 31% over the first quarter of 2021-22, reflecting a step-up in capital expenditure. This should be viewed as a precursor to higher sustainable economic growth. Investment activity has long been seen to give India its long-term growth impetus. Yet, this GFCF uptick has not ignited celebratory fireworks. One critical reason, going by past data, is that investment needs to go above 30% of GDP for economic growth to range above 7% on a year-to-year basis, a necessary and sufficient condition for India to fund its poverty alleviation programmes without running up a large debt bill. We clearly need to do better.
The sub-par GFCF data release also shrouds other uncomfortable facts. In the absence of disaggregated data, we can safely assume that the government contributes to a large chunk of GFCF. It is widely believed that capex by the Centre will eventually lead to private-sector plough-ins, which are critical for providing the final push to economic growth. In her February 2022 Budget speech, finance minister Nirmala Sitharaman categorically stated: “Public investment must continue to take the lead and pump-prime private investment and demand in 2022-23." And yet, despite New Delhi’s large outlays, private investment demand seems resolutely inelastic to inducements; the private sector remains investment shy despite data that suggests capacity utilization has begun hitting a wall. The government should get to the roots of this worry. There could be two proximate reasons for this reluctance and it must address both urgently. One, a distaste for a jerky policy environment, which renders private plans and projections infructuous. The second is a broader systemic apprehension of an emerging institutional framework that has fostered a forbidding hierarchy of power.
The Centre must also realize that, in a federal structure, the states are its partners in the growth process. In fact, numerous studies have shown that capex by states has a higher multiplier effect than such spending by the Centre. Again, while this year’s Budget promised additional funds to states for capital expenditure—including for schemes like Gati Shakti and Gram Sadak Yojana—the reality on the ground is different. Many states are in poor fiscal shape, with the extra-budgetary expenditure incurred during the pandemic still weighing on their finances. Central devolution to these states, many of which are heavily dependent on the Centre for funds because of their low industrial activity, has also been tardy. Consequently, many states have been languishing, with revenue spending—on salaries for state employees, for example—absorbing all available resources at the cost of investment. Remember that our economy is still in the throes of an extraordinary crisis. The Centre should, therefore, set aside political differences and continue to act as a guardian of the weak and vulnerable. Economic growth, after all, is ideology agnostic.
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