The alarming investment slide

The provisional GDP estimates for 2014-15, released late last month, point to a scary trend — the steady fall in capital formation as a share of GDP. In earlier times, economists in government would have talked about it, but this time there has been little or no comment.

Gross Fixed Capital Formation (GFCF) or investment in the economy fell from 33.6 per cent of GDP in 2011-12 to 28.7 per cent in 2014-15 as per the May estimates. This trend was also revealed in the advance estimates of GDP released in February.

This magnitude of decline in investment as a share of output (of five percentage points) hadn’t taken place in independent India’s economic history. For it to pass unnoticed is a sad comment on its policy elite.

These figures were at current prices; but even in constant prices the share went down from 33.6 per cent to 30.0 per cent — roughly four percentage points.

This was equally disturbing, having never happened earlier.

What it really means is that a couple of percentage points at least have been shaved off this year’s GDP growth prospects.

In constant prices, the Q4 2014-15 GFCF figure was 29.7 per cent, having fallen from 30.4 per cent in Q1.

In current prices the figure went down from 29.2 per cent in Q1 to 28.7 per cent in Q4. All this needs serious debate, rather than temporising on channel TV.

Of course we have the professional happy souls. So for 12 quarters since the 2008 global crisis, Montek Singh Ahluwalia, C Rangarajan and some others kept on telling us that the next quarter would be better, and now Arvind Panagariya and Bibek Debroy are the sarkari songsters.

It’s only Rangarajan who believes that ‘efficiency’ will take care of macro irresponsibility. It is, therefore, very reassuring to hear the finance minister say that he is raising investment levels.

I know we don’t believe in investment planning anymore, but the finance minister should give us hapless bystanders a clue as to whether he will raise investment levels by one per cent of GDP so that he at least recuperates the economy from the mess Manmohan Singh left it in last year, or by two to four per cent, taking the recovery profile back to 2011-12. Happy days will be back again.

The RBI in April was apprehensive about the new GDP numbers and said that manufacturing output was definitely a matter of concern. It is not impressed by the new numbers because corporate results do not show any promise; a point I can vouchsafe with the corporate boards I am a member of.

The IMF chief was equally ‘puzzled’ during her visit to India. Now, this is interesting.

The problem, in fact, arises from the International Data Dissemination System the IMF has designed for us, so her bewilderment is quite disconcerting. She should have explained more. In the mid-nineties we decided to follow global standards. I was then Minister of Statistics.

Our statisticians, particularly the CSO, were against our moving over. Now I am a great admirer of our MET and our statisticians.

They do a thankless job and smart alec journos who largely don’t understand the difference between a forecast and a final number, make their lives miserable.

They also don’t have a Minister to stand up for them in Parliament. But in this case I overruled them because I felt that our numbers should be comparable.

Much as I admire our national income statisticians, I must say that I don’t trust them to read a Corporate Profit and Loss Account very carefully, despite their struggling with the IMF’s data dissemination standards.

As we go from the value of output at the factory gate to the market, the cost items any experienced corporate honcho goes through with a great sense of familiarity is a maze for the CSO.

The fix on marketing expenses as a service is still not quite clear. Meanwhile, I was not too happy at the IMF chief saying India should live with both numbers.

We are the land of PC Mahalanobis and the Indian Statistical Institute and Sankhya is still a great journal, so we must lick this problem. With the National Statistical Commission there (I don’t know if the National Income Advisory Committee is still there), we should get the answers, and soon.

Meanwhile, we would be happy if the finance minister were to raise investment at least by one per cent; two is better for what’s a per cent of GDP between friends like Panagariya and Jagdish Bhagwati.

The writer is the Chancellor of Central University of Gujarat, and a former Union minister

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