Economy

Investment rate slumps below 30% to 2004-05 lows

Priya sundarajan | | Updated on: May 31, 2012
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If there is one thorny issue that policymakers need to squarely address to spur growth, it is the falling investment rate or Gross Fixed Capital Formation (GFCF).

The revised estimates of national income for 2011-12 released by the Central Statistics Office (CSO) on Thursday revealed that GFCF has fallen to 29.5 per cent of GDP at current prices for that year.

This is the first time that GFCF has gone below 30 per cent since 2004-05, compounding problems for the Government, which is already buffeted by such challenges as reform inertia and criticism over retroactive changes to income-tax law.

The economy registered a lower-than-anticipated growth of 5.3 per cent in the fourth quarter of 2011-12, confirming that slowdown in Asia's third largest economy is deepening. In the same quarter last year, the economy had clocked 9.2 per cent growth.

Hurt by investment slowdown and weak manufacturing performance, the growth estimate for 2011-12 has been revised downward to 6.5 per cent, lower than the advance estimate of 6.9 per cent put out by the CSO in February. The economy grew 8.4 per cent in 2010-11. The fourth quarter GDP growth for 2011-12 was pulled down by weak manufacturing sector performance which contracted 0.3 per cent against 7.3 per cent growth in the same quarter last year.

The Finance Minister, Mr Pranab Mukherjee, described the figures as “disappointing” and blamed the RBI's tight monetary policy, weak global sentiments and environmental policy bottlenecks in mining.

He, however, said that most of these factors had bottomed out. The rate cycle has been reversed; mining sector growth has turned around; progress has been made on fuel linkage for coal-based power projects; there is a turnaround in the investment rate (gross fixed capital formation) in the fourth quarter and normal south-west monsoon has been predicted for 2012-13. All these should help in the recovery of growth momentum, he said.

The disappointing news on GDP growth numbers came on a day the rupee hit a new low of Rs 56.50 against the dollar. The benchmark Sensex managed to hold up despite the below-than-expected GDP figures and ended the day down 93 points after plunging over 148 points in early trade.

Another data point that reflected a slowdown was core sector growth for April. The growth rate of eight infrastructure sectors output slowed to 2.2 per cent from 4.2 per cent in the same month last year. Poor performance of crude oil, natural gas, petroleum refinery products and fertilisers weighed down the numbers.

>krsrivats@thehindu.co.in

Published on March 12, 2018

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