Investment atrophy

The scaling down of last fiscal’s GDP growth to 4.5 per cent, from the earlier 5 per cent estimate, could well be the precursor to an equally depressing set of national income data figures for 2013-14. But even the 4.5 per cent number, low though it is, fails to capture the real crisis that relates to gross capital formation (GCF): the stock of fixed assets added to an economy and contributing to its future production growth. A characteristic feature of any dynamic emerging economy is that the accumulation of such capital stock — from factories to roads and power plants — by it increases at a faster rate than GDP.

The period from 2004-05 to 2010-11 for India witnessed an average annual GCF growth of 15.2 per cent, well exceeding the GDP increase of 8.5 per cent a year. This trend has, however, reversed subsequently. The dip in GCF growth to 6.4 per cent in 2011-12 and a mere 2.4 per cent in 2012-13 has been more than the corresponding fall in GDP rates to 6.7 and 4.5 per cent. But the actual extent of drying up of investments can be gauged only from examining the components within GCF. Most significant is decline in fixed capital formation by the corporate sector in real terms, by 0.1 per cent in 2011-12 and 3.6 per cent in 2012-13. Equally revealing is that GCF in manufacturing has recorded negative growth of 17.5 and 13.2 per cent respectively. It is mainly sectors such as trade, road transport and real estate that have posted high or reasonably positive growth in capital formation. These, unlike manufacturing, don’t require much by way of machinery and capital stock. Besides, there is enough evidence now of the slowdown in growth and investments spreading to even services; this might well show up in the data for 2013-14.

The short point that emerges from all this is that the current slowdown is primarily about a collapse of investments. When corporates began going slow in putting up new manufacturing facilities around mid-2011, the effects of it were felt on job creation, incomes and consumption over time. We are clearly in a situation where no growth pick-up is possible without a resumption of the stalled capital accumulation process. The Centre has a crucial role in this respect and it is not limited merely to expediting statutory clearances, important though this is. What it must do is invest directly in select railway, roads and other infrastructure projects that have a high multiplier effect. The money can be found if there is a more serious attempt to rationalise subsidies and place a firm check on wasteful consumption expenditure. The savings from this are best directed towards growth-promoting investments.

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