The trillion-dollar question for the trillion-dollar Indian economy now is how deeply the economic slowdown has affected investment sentiment. The earlier secular pick up in growth was clearly associated with a sharp rise in investment. Corporate investments almost trebled to 14.5% of GDP in the seven years of this decade. Some would still argue that a one-month blip in capital goods production, as seen in January?s IIP figures, is not clinching evidence. But evidence from other datasets shows that a cyclical downturn in investment is already taking place. The best evidence comes from the Central Statistical Organisation data on investment released early last month. This shows a sharp slackening in investment growth. Growth in gross capital investment, which touched a high in 2003-04, has slipped by half in 2006-07. And the investment-to-GDP ratio that had increased by 3.3 percentage points in 2005-06 crept up by a bare 0.4 points in 2006-07. Figures for manufacturing are starker. Investment in manufacturing grew by 70.1% three years ago. Annual growth was less than half that figure last year. Clearly, therefore, data coming in now is part of a pattern observable for a while. Another hugely significant indicator is that despite the appreciation of the rupee, which has made imports cheaper, there has been no surge in the import of investment goods, as should have happened. Growth of machinery imports in rupee terms has been cut by more than half to just 23% in the first seven months of the fiscal year. Also, consider that with stockmarkets in a slump, another source of investor sentiment, the mood of portfolio investors is affected. Combined with bad news from the real economic sector, the impact on overall investor sentiment can?t be hard to guess.
Industry?s cutback of investment in response to falling demand for consumer durables may have started, as our columnist argues today. As these columns argued on Thursday, P Chidambaram?s Budget stimulus, especially the income-tax and excise cuty cuts, may not alone revive consumer demand. It will need, let us say it one more time, a sharp, quick interest rate cut. That will be a huge boost for entrepreneurial animal spirits as well as make consumers feel less squeezed in terms of the effect of their EMI payments going down.
