The Hindu Business Line : Pvt corporates regain dominant investor status

New Delhi, Feb. 5 Private corporates superseding public sector undertakings as dominant investors in the economy is something that is taken for granted in today’s world.

While this is certainly the case in India, what is striking though is the extent and manner in which it has happened. In 1990-91, gross capital formation in the public sector, at Rs 56,874 crore or almost 10 per cent of gross domestic product (GDP), was more than twice the Rs 25,575 crore (4.5 per cent) invested by private corporates.

But in 2006-07, the position had virtually reversed itself, with the Central Statistical Organisation (CSO) estimating gross capital formation by private corporates at Rs 6,03,014 crore or 14.5 per cent of GDP. That makes it nearly twice the Rs 3,21,753 crore (7.8 per cent) of public sector investment, according to the CSO’s latest national income data.

However, this role reversal has not taken place as smoothly as one would expect. On the contrary, the transformation has been marked by abrupt movements. In fact, right until 2004-05, public sector firms continued to out-invest their organised private counterparts.

Then came 2005-06, a landmark year when for the first time, private corporates displaced state-owned undertakings to emerge as the dominant investors.

Driven by the optimism accompanying the initial flush of economic reforms, India Inc went on an investment binge. But this unshackling of the ‘animal spirits’ lasted only till around 1997-98.

By 1998-98, the public sector had re-claimed its previous dominant investor status. On the other hand, between 1995-96 and 2000-01, private corporate investment as a proportion of GDP halved from 10.4 per cent to 5.2 per cent; moreover, it shrank even in absolute terms, from Rs 1,23,899 crore to Rs 1,09,013 crore. This was a period that the Prime Minister, Dr Manmohan Singh, – sitting in the opposition then – had famously characterised as an ‘investment famine’.

Since then, there has been a renewed turnaround, more so from 2003-04 (the last year of the Bhartiya Janata Party-led regime). Between 2000-01 and 2006-07, gross capital formation by private corporates has gone up 5.5 times to over Rs 6,00,000 crore, while roughly trebling as a percentage of GDP. During this latter period, public investment has also recorded a pick-up, in both absolute as well as relative terms.

Nature of investments

Significantly, investment activity in the public sector has been steady all through the post-reform era. Unlike private capital formation, which has waxed and waned, there was only a single year (2002-03) that registered an absolute decline in public investment.

The other notable feature pertains to the nature of investments. In 2006-07, out of the Rs 3,08,603 crore fixed capital formation in the public sector, well over two-thirds (Rs 2,14,195 crore) was in ‘construction’, with only Rs 94,408 crore going towards ‘machinery and equipment’.

It was quite the reverse for private corporates, where almost three-fourths (Rs 3,86,395 crore) of their gross fixed capital formation of Rs 5,29,871 crore was in the form of ‘machinery and equipment’ and the balance Rs 1,43,476 crore in ‘construction’. Simply put, it means that the new factories being set up are mostly in the private sector, whereas public investment is being largely directed to roads, railways, irrigation and other infrastructure projects with significant construction component.

More Stories on : Corporate | Investments | Economy

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page