Financial Daily from THE HINDU group of publications
Saturday, Dec 21, 2002
Columns - Economy - A Perspective
Alternative structure of investments
P. R. Brahmananda
THIS and subsequent articles will discuss the major reasons why the Indian economy at the macro level is not performing as well as it should be. Certain tendencies and propensities are reflected in the empirical data and these have to be consolidated to understand why we are not growing at the rate we hope for and in the directions we desire.
Something has seriously affected the working of the economy, and this factor has to be identified. It may be true that in a few sections, such as exports, current account deficit, and software and related sectors, the economy may be performing better than expected. But this is only a portion of the economy and we have to look at the whole economy's course.
My view is that the media's and the Ministry's perceptions have been rather too dominated by fiscal worries, stock market fluctuations, behaviour of individual companies, the success of the disinvestment process, and so on. But behind these, certain fundamental factors have gone wrong and we have to identify what they are.
One cannot understand the course of an economy from the course of superficial and surface indicators. We have to go deeper into the malaise. A consistent macro-theoretical perception is necessary. The policy-makers are being goaded to provide ad hoc and patchwork solutions from a temporary angle. This will not help.
Let us begin with an important proposition. The growth rate of real output in the economy is equal to the growth rate of capital stock and the rate of improvement in the productivity of capital in the economy. If the capital output ratio is going down the productivity of capital in the economy will go up. Hence, the growth rate of output will be higher than the growth rate of real capital stock.
But this has to be understood from a longer-term angle. It is possible to economise on the high-capital-output-ratio-output growth rates, and to concentrate on the relatively low-capital-output-ratio-output growth rates.
For example, we may economise heavily on investments in irrigation, electricity, water supply, railways, power capacities, etc. As a result, the capital-output ratio will fall because long-term, long-gestation-period and long-durability investments will be economised upon.
But soon, the capacity of output growth will be limited, as the short-term and medium-term investments will not grow, and bottlenecks in power, water, communication, and so on, will develop. Making good the shortages through alternative sources will involve higher costs and also affect exports, even in software, etc.
The course of the capital-output ratio has to be carefully analysed with respect to investments being foregone or being pushed forward. We are blithely foregoing long-gestation-period and long-durability investments in infrastructure, etc. But, the Planning Commission, God bless its members, wants longer-term infrastructure investments to increase in proportion while, at the same time, the capital-output ratio should fall! Anyway, there is no prospect of long-term investments getting importance in the economy in various forums.
Since the 1990s, we have been shifting investment responsibilities to the private sector. The public sector is seeking to disinvest and divest its responsibilities. There is no prospect of public sector investing in long-term capacity expanding investments. But the private sector has not filled the vacuum. It is primarily governed by growth of consumption demands. Autonomous investment does not fall in its purview.
The Graph outlines the rate of growth of private sector net fixed capital stock, the rate of growth of public sector fixed capital stock and the overall growth rate of net fixed capital stock. Data on inventory investments are not very accurate and, further, because of the excess stocks with the public distribution system, our analysis will be distorted. We have, therefore, confined the analysis to growth rates in net fixed capital stocks.
The Graph indicates that the rate of growth of the public sector fixed capital stocks has come down from 3.89 per cent per year between 1991-92 and 1994-95, to 2.94 per cent from 1996-97 to 2000-01. This was according to the policy advised by World Bank, directly and indirectly.
The rate of growth of private investment, which was 4.43 per cent per annum from 1991-92 to 1994-95, went up to 6.69 per cent between 1993-94 and 1997-98. Thereafter, it has been falling, and from 1996-97 to 2000-01, the rate of growth was just 4.76 per cent per annum.
One will notice that the rate of growth of net fixed capital stock for every sequential four years indicates an umbrella curve pattern. The peak rates of growth were reached between 1993-94 and 1997-98. Thereafter, there has been a declining trend.
The exit of the public sector has not been compensated by the entry of the private sector in capital stock growth rates. The entire economy's profile of capital stock growth rates has been transformed during the last decade or so. If capacities are not growing, the capital output ratio may be brought down slightly by overworking capacities.
But, over the long run, such capacities must grow and, if the public sector which has the longer-term horizon and can balance profits and losses over a long run does not take interest in long-term investments, the growth rate of the private sector will also be restricted, even in terms of investments.
I wonder whether the planning authorities or the Finance Ministry is aware of the serious crisis in respect of the structures of capacity growths. At some stage or the other, if this process goes on, the private sector growth rate of capital stock will become less and less. The public sector's capital stock growth rate will surely keep falling. At some time in the future, a stationary state in respect of capital stock might become a reality. How, then, will the output growth rate be positive thereafter?
Unfortunately, the long-term investments in infrastructure, etc., are not concerned with goods and services that are tradeable. In such a context, if they were tradeable, we might have a way out through imports. This escape route is not available.
The solution to revival of investment in private sector is not found within that sector. Any amount of incentives and any extent of reduction in interest rates will not help here. The initiative has to come from the public sector. But how do we provide savings for the public sector for long-term investments without being bogged down by the revenue deficit? The public sector will use the savings for reducing the revenue deficits. We have to find a way out.
My suggestion is let banks collect long-term fixed deposits by paying higher interest rates and let the funds be earmarked for long-term investments.
This requires higher interest rates on long-term savings and investments, and the state allowing such increases in deposits to be utilised directly for long-term investments.
This means that outside of the Budget a source for receipts of savings must be provided, and this source should not be mixed up with the traditional borrowings of the Government. There may be some leakages of interest payments for consumption. But this can be provided for. If necessary, as social returns through long-term investments are higher than private returns, one may even contemplate a subsidy on interest on certain types of fixed deposits.
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