The defining narrative of the slowdown in India’s GDP growth over the past 6-7 years has been the sharp drop in investment, even as consumption remained stable and is presumed to have been the primary driver of growth. The accompanying graphic shows the drop in investments (as a share of nominal GDP), from 34 % in the new series GDP in FY12 to 29.3% in FY16, and to 27.1% in FY17. The general presumption—based on data on stalled and incomplete projects, slowing corporate revenue growth and a slowdown of bank credit to infrastructure and large corporates—seems to be that this was a predominantly corporate-led slowdown. It appears that this interpretation might be, at best, only partially correct—or alternatively, this was only a causal factor. The graphic also shows the decomposition of the investment slowdown between major economic groups. The point to note is that the slowdown almost entirely originates in households—and not the corporate sector! While corporate investments have remained stable at around 11% of GDP, household (HH) investments dropped from 16% of GDP in FY12 to 11% in FY16 (FY17 breakups are still not available). This is a fairly non-intuitive twist in the current investment slowdown narrative. This is not to say that corporate investments have not fallen; they have, in line with the slowdown of nominal GDP growth (from 13.5% to 9.7% y-o-y). But, household investment has fallen much more sharply.
The proximate cause for this slowdown might—in fact, a bit paradoxically—be ascribed to the corporate sector. From a peak share of 41% in total fixed investment in FY08, corporate capex fell to 28% by FY13, and this is mirrored by a rise in the share of the household sector (the share of the public sector has remained more or less stable). This trend then reversed (in the new GDP series) from FY12 to FY16, with the share of the private corporate sector rising—the difference being the rising share of the public sector. Both segments had eaten into the share of households. This causation channel of the transfer might be explained heuristically as follows. The accompanying graphic also shows the worsening financial condition of India’s corporates (based on a sample of 2,400 companies), with a sharp drop in sales. This had a consequent adverse effect on employee salaries and wages, whose growth slowed from a high of 45% y-o-y in 2008, down to an average of 12-13% over the next few years, before dropping even further to sub-10% in FY16. The presumption is that this led to a drop in HH disposable and discretionary incomes, whose distribution between consumption and savings points to the cause of the investment slowdown. Private consumption expenditure had crept up over FY12-17, from 56% to 59% of GDP. Given shrinking incomes, this unfortunately seems to have depleted HH savings that fell from 25.2% of GDP in FY10 to 17.8% in FY16.
Within overall HH savings, the drop was due to a combination of both financial and physical savings, the latter contributing predominantly in recent years. Over the years, 80-90% of HH physical savings were in “dwellings, other buildings and structures” and most of the rest in “machinery and equipment”. Given that HHs include small proprietorships and firms, some of this is likely to be accounted for by commercial establishments. But, the dominant share is likely to be dwellings (machinery and equipment is passenger and commercial vehicles.) The prevailing macroeconomic environment seems to be partially responsible for this behaviour. Post the 2008 financial crisis, with the fiscal stimulus and implementation of the 6th Central Pay Commission awards, a transitory bump-up in financial savings is visible, but then follows a long slide, even as physical savings begin to rise. Note that gold holdings are not an explanation for this till FY12, since in the older GDP series, gold and valuables were counted as personal consumption, not savings. The other factor—inflation—might have a role: A surge in CPI inflation since 2009 might have accelerated a move-out of financial savings (ex-gold) but is insufficient to explain the continued slide. Neither do interest rates explain the residual.
One strong explanator, given the share of real estate, might be property prices. The RBI House Price Index shows a sharp deceleration since FY12, which indicates that the expectation of continuing real estate appreciation as a motivator for buying homes will have reduced. This reduced “pull” factor will have added to the “push” of falling discretionary incomes, inducing a vicious cycle where reduced disposable income lowers demand for housing, which disrupts construction and the resulting tail of economic activity, thereby lowering capital spends in a multitude of sectors. If this is indeed the proximate story of the sharp fall in investment, this has strong policy implications for growth and investment revival. The affordable housing push is the boost required for breaking out of the low level equilibrium, incentivising construction and the associated supply-chain.
By Saugata Bhattacharya
Senior vice-president, Business and economic research, Axis Bank
Views are personal
With contributions from Vikram Chhabra