While the US and Europe are worried about a double-dip recession, the Indian growth story has so far looked good. However, despite the official GDP data holding up, investment appears sluggish. Since investment has been the strongest driver of growth in recent years, this is a worrying trend. Three indicators that give us some information about how investment activity is expected to behave in the coming months suggest that growth in investment may decline.
Figure 1 shows the year-on-year growth in new projects added in the last quarter. The data comes from the Centre for Monitoring Indian Economy, which has a database (CapEx) of all the investment projects in the country. Data for the April to June quarter 2010 had shown an increase in the value of new projects to the tune of Rs 6.2 lakh crore. In the July to September quarter 2010 only half of that, i.e., Rs 3.2 lakh crore was added under the new projects. This data series includes all projects proposed by the private sector and governments (Centre, state and local). One factor in the decline seems to be the new projects proposed by the central government, which fell from a total of Rs 14.7 lakh crore to Rs 14.4 lakh crore instead of going up, as they normally do.
While new projects of the private sector did not decline, we look towards the performance of the private sector to predict trends about investment in the coming year. One of the indicators of high investment activity in India is the corporate profits. Partly, firms are likely to extrapolate from their recent experience of profitability when making decisions about the viability of new plants.
In addition, given the weaknesses of Indian finance, internal capital (retained earnings) plays a very important role in the financing of investment. Figure 2 shows that the growth in profits has fallen sharply to zero per cent. By historical Indian standards, where a torrid pace of earnings expansion was the norm, this is unusual. Indeed, what we have seen in the past has been about a 15 per cent steady growth in profits year after year. During the boom when the Indian economy was overheating from 2006 to 2008, profit growth rose to 30 per cent or above. Zero profit growth suggests a more daunting business environment and also a reduced access to capital.
The third variable we look at is the production of capital goods. This is measured by IIP capital goods, which has shown some pretty sharp fluctuations in the recent period. We look at seasonally adjusted 4-month moving averages so as to avoid being influenced by month-on-month variation in the series. As Figure 3 shows the number is now negative.
There may be many reasons for the decline in investment. These would include a decline in demand from exports as well as the end of the fiscal stimulus. With the world in a prolonged recession, it is not surprising to find evidence that supports a double-dip downturn rather than a growing robust economy.
?The author is a professor at National Institute of Public Finance & Policy. Views are personal