How can India revive its investment cycle?
An issue that has been nagging policy makers is the revival of the investment cycle. While the central government has been meeting its target on capex in the last few years, the trajectory in case of the private sector and state governments is less certain.
At the aggregate level, the gross fixed capital formation provides some clues to what is happening. The good news is that the investment rate has improved from 30.8 per cent in 2022-23 to 31.3 per cent in 2023-24. This is encouraging given that this ratio had gone down to 27.2 per cent in 2020-21. In 2022-23, 59 per cent of this was in construction of “dwellings”. The boost to housing provided by the government has resulted in this increase in capital formation which is good for the economy. But, considering that the share of plant and machinery had come down from 36 per cent in 2017-18 to 30.7 per cent in 2022-23, at the aggregate level, there is still some distance to traverse.
On the trends in private sector investment, one source of data is the CMIE’s data on new investment announcements. In 2023-24, it had touched Rs 27.1 lakh crore, which, though is lower than the Rs 39 lakh crore worth of announcements in 2022-23, was the second highest in the last decade. This, of course, refers only to intentions which may not necessarily materialise. But, clearly, there is some promise insofar as companies are looking towards investing more. Of the total intentions, 85 per cent came from the private sector, of which 11 per cent is from foreign companies.
There are also other indications of activity. Debt issuances were at a high of Rs 11.1 lakh crore in 2023-24, as against Rs 9.64 lakh crore in 2022-23. However, 71 per cent of this amount was raised by the financial services sector. Does this suggest that activity is not that broad based?
The CMIE data throws some light here. Of the Rs 27.1 lakh crore of investment announcements, the highest share was accounted for by the power sector. One possibility here is the thrust being given to renewables is leading to a sizable expansion in capacity. The Production Linked Investment (PLI) scheme of the government which covers solar panels, etc., could have been a trigger for greater investments.
The second, most important sector was transport services. Here, airlines have contributed to the increase in investment intentions — the two large airlines companies have made announcements which point towards a dramatic expansion in their fleet over the coming years. But as these will be met through imports, the effects of backward linkages to domestic industry will be missing, even as they improve airline traffic and generate value addition for the forward-linkage segments such as airports and related services.
The other industries which have made significant announcements are chemicals, machinery, metals and auto. Together, these six industries account for 90-92 per cent of all announcements. The significant aspect of this list is that there are no consumer-oriented industries, even those in the electronics space where the PLI scheme has been a game changer. Based on these trends, one could argue that even as the private investment cycle has picked up, it is not yet broad based. It is restricted more to industries which have government capex as front-loading investments. Hence, metals and machinery are doing well due to government spends on roads and railways.
The next question is: Why are not companies in the consumer goods segment investing? The answer lies in the fact that there is still excess capacity in these industries. Typically, companies invest more in capital as demand rises and capacity utilisation rates come closer to the 80 per cent mark. But, demand has been affected over the last few years for a variety of reasons. First, more productive jobs, which substantially increase purchasing power, have not been created. While employment has increased in construction and logistics, the wages in these sectors are not that high. A number of large companies are going slow on hiring. \
Second, rural demand has not quite picked up due as farm production is not steady. Third, high inflation, which now adds up to 24 per cent in the last four years, has eroded the consumption power of households. High food inflation reduces room for discretionary spending. The pent-up demand had ebbed.
On the other hand, state governments have tended to slow down on their capex in order to meet their fiscal targets. In 2022-23, states spent Rs 6.08 lakh crore as against a revised estimate of Rs 7.32 lakh crore. Considering that put together capex by states accounts for a sizable share of overall investments in the economy, how states spend will also have a bearing on the investment cycle in the country.
The writer is chief economist, Bank of Baroda and author of Corporate Quirks: The darker side of the sun. Views are personal
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