The annual forecast for capital formation (GFCF) has been steeply cut from 9.4 per cent to a mere 6 per cent in the first half of the current fiscal year.
Construction, new machinery, and other investments in the economy are poised to remain subdued in the coming few months since the economic indicators show no sign of recovery in the near-term. The annual forecast for capital formation (GFCF) has been steeply cut from 9.4 per cent to a mere 6 per cent in the first half of the current fiscal year, according to the latest RBI report. Investments play a crucial role in the economic growth of a country thus along with the fall in demand, it is majorly responsible for the ongoing slowdown. To boost the investment, the RBI has slashed repo rate by 135 basis points since February in five back-to-back reductions.
Even Finance Minister Nirmala Sitharman has announced various measures which could help in reviving the momentum of investment. However, high-frequency indicators suggest that investment activity remained sluggish in the second quarter of the current fiscal year.
The slowdown has engulfed India’s economy in a way that the central bank had to cut India’s annual GDP forecast by a whopping 1.1 percentage points in six months to September 2019. The continued slowdown in the domestic private consumption demand and investment growth, coupled with likely lower global output growth, led to a downward revision in the GDP growth forecast path, going by the RBI report.
Gross capital formation refers to the overall investment on construction, machinery, transport equipment, etc, which includes the capital expenditure of defence enterprises on ordnance and clothing factories.
On the other hand, consumption, which is measured in terms of PFCE includes final consumption expenditure of households and non-profit institutions serving households like temples, gurdwaras. The final consumption expenditure of households relates to the expenditure on new durable or non‑durable goods and services.
Meanwhile, the central bank has also cut the annual forecast for India’s expenditure on consumption (PFCE) to grow at a mere 5.5 per cent now, dramatically slower than 8.1 per cent projected in March 2019. The lower forecast for PFCE, per RBI’s November bulletin, reflects lower households demand as indicated by moderation in the production of consumer durables.