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The sharp slowdown in investments revealed in the latest GDP numbers is likely to continue going forward, economy watchers say.
Private sector investments are likely to remain weak going forward as policy impediments such as land acquisition issues and problems with environmental clearances weigh down heavily on overall capital formation in the country, they point out.
The investment climate and ease of doing business in infrastructure area are critical issues that need to be addressed if India were to achieve the investment rates seen in 2007-08 and the first half of 2008-09. The infrastructure space is still not very conducive for private investments.
Although the decline in investment rate is disconcerting, the Government has sought to play down this issue. The second quarter GDP data, released on Thursday, showed Gross Fixed Capital Formation (GFCF) declining by 0.6 per cent in real terms to Rs 4,02,994 crore (Rs 4,05,567 crore).
The investment rate (GFCF as a percentage of GDP at current prices) has come down to 28 per cent in Q2 of current fiscal, lower than the 30.3 per cent seen in Q2 of 2010-11 and 33-34 per cent levels achieved in 2007-08 (at the peak of the India growth story), official data showed.
The investment rate was 28.45 per cent in Q1 of 2011-12. The steady decline in investment rate is being seen as an important reason for slowdown in GDP growth.
Part of the reason for the steady decline in investment rate could be international factors like the Euro zone debt crisis and slowdown in the US economy. Raising finances externally for domestic projects is not all that easy today when compared to the pre-crisis period, economy watchers pointed out. There are issues of availability of funds. The sharp depreciation of the Rupee has added to the woes of corporates borrowing abroad.
There is also going to be little support by way of Government spending, which has already cooled from a growth of 6.5 per cent in first half of fiscal 2010-11 to 3.1 per cent in first half of 2011-12, a research note of HDFC Bank pointed out.
Even after factoring in some moderation in net government spending going ahead, the net fiscal deficit for financial year 2011-12 is likely to be close to 5.4 per cent of GDP against the budgeted levels of 4.6 per cent, the research noted added.
“The Government has to facilitate a better investment climate. Risk appetite of industry is reducing. There are a number of factors including corruption cases and the uncertainty around Government decision making. Many are wary of taking investment decisions in this climate,” Mr Pavan Kumar Vijay, Managing Director, Corporate Professionals, a professional services firm, told Business Line here.
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