It is said that more investment, especially in infrastructure, is the surest way to take the Indian economy back on rails. Data shows that gross investment as a % of GDP has been at 34.7% in 2005-06, up to 38.1% in 2007-08 and subsequently came down to 32.3% in 2011-12 before hitting 33.3% last year.
Correspondingly, the country?s GDP reached 9.3% in 2007-08, dropped to 6.2% in 2011-12 and severely dropped to 5.0% in 2012-13. Looking at the figures, it appears the contribution of investment to GDP growth has in the recent period weakened. There may be two plausible reasons. Although investment is taking place at a reasonable rate, one unit growth in GDP is consuming more units of investment than what it was earlier due perhaps to changes in the pattern of investment from infrastructure to social sector, including ITES, having lower output-intensity. This would have translated into a higher capital-output ratio and brought down GDP growth given a marginally lower level of investment.
And the second reason relates to a plethora of stalled projects where investment has been made without a corresponding addition to output. The delayed response of output to expenditures is reflected in lower GDP growth despite growth in investment and a higher capital-output ratio.
This also raises an interesting phenomenon for 2013-14. After the stalled projects get clearances and the project commences production, the output growth would materialise and this would require less investment in totality for GDP growth in this year. However, it must be appreciated that investment made in one year in capital-intensive projects does not, in normal circumstances, lead to generation of output in the same year and would spill over to the next. Thus an average concept of capital-output ratio is more appropriate. Meanwhile, belying the huge market expectations, the RBI has brought down repo rate by only 25 basis points to 7.25%. It may lead to only a marginal change in personal loans and not influence the non-food credit component.
The GDP forecast for 2013-14 at 5.7% is lower than the government projection at 6.1-6.7% and is possibly weighed down by the downward risk of widening CAD, which has already reached an alarming proportion of 6.7% of GDP in Q3 of 2012-13. The monsoon forecast is normal and hence the risk of supply bottlenecks supposed to contribute to price rise of food items is minimised. The prices of non-food items are likely to fluctuate within a band. Taken together, the WPI would hover around 5.5% as envisaged by RBI. If things follow this line, the RBI may reduce repo rate further in October by say 50 basis points. Would it raise GDP growth to more than 6.5%? If the answer is uncertain, one must look for other reasons actually restrains the growth perspective.
Is it more investment in infrastructure, speedy clearances of the stalled projects, passing of the pending bills on land and mining resources, facilitating more FDIs, bringing down CAD and fiscal deficits by cutting down imports, raising exports, introducing GST, introducing a plethora of reform measures and above all, enhancing the standard of corporate governance to a much higher level?
The tasks ahead are challenging before we dream of putting GDP to a higher growth trajectory.
The author is DG, Institute of Steel Growth and Development. The views expressed are personal