Share of investments in GDP to rise 33% by FY23: RBI working paper

By: | Published: October 17, 2018 2:42 AM

Interestingly, the paper has listed higher real lending rate as one of the reasons for lower investments. A one percentage point hike in the real lending rate, it says, reduces the real investment rate by 29-40 basis points.

Share of investments in GDP to rise 33% by FY23: RBI working paper

The share of investments in gross domestic product (GDP) will rise to 33% by FY23 from 31.4% recorded in the last fiscal, a working paper of the Reserve Bank of India (RBI) has forecast, suggesting that the upturn in the current investment cycle that started in FY17 could last for five more years.

Interestingly, the paper has listed higher real lending rate as one of the reasons for lower investments. A one percentage point hike in the real lending rate, it says, reduces the real investment rate by 29-40 basis points.

Hike in the repo rate has often been a contentious issue between RBI and the finance ministry, with the latter usually seeking a reduction in the benchmark lending rate to spur economic growth. The paper says the views expressed are of the authors, and not of RBI’s.

The share of investment in real GDP dropped from 34.3% in 2011-12 to 30.3% in 2015-16 before recovering.

Further boosting investment rate will require “policy efforts on multiple fronts such as further improving ease of doing business; expediting resolution of distressed assets; addressing the NPAs problem; and speeding up implementation of stalled projects”, it noted.

The working paper has been authored by Janak Raj, Satyananda Sahoo and Shiv Shankar. These measures will help ride the current phase of the investment cycle to its peak and boost medium-term prospects of investment activity, says the paper titled “India’s Investment Cycle: An Empirical Investigation”.

The acceleration in real GDP growth to a nine-quarter high of 8.2% in Q1FY19, acceleration in bank credit growth and buoyant stock market augur well for sustaining investment activity going forward. However, uncertainties on the global front and financial market volatility need to be guarded against, it says.

Capacity utilisation in manufacturing has also picked up since the second half of the last fiscal and has reached the long-term average level (or around 75%) by the March quarter. From less than Rs 10,000 crore in 2016-17, the resource mobilisation through the primary market exceeded Rs 23,000 crore in the last fiscal. Bank credit growth, which decelerated from 21.3% in March 2011 to 4.5% in February 2017, has also shown a gradual pick-up from the third quarter of 2017-18. Credit flows to industry, which contracted from October 2016 to October 2017, has turned positive since November 2017.

The paper finds investment activity is affected by several macro-financial factors, including GDP growth, real interest rate, bank credit growth, global GDP growth and gross fiscal deficit (GFD). The GFD crowds out investment demand.

It suggests that from 1950-51 to 2017-18, there were broadly nine episodes of contraction/upturn phases of two years and above. Of these, four phases of downturn in the post-liberalisation period have been of severe magnitude–first half of the 1990s; early 2000s; 2007-08 to 2009-10; and 2011-12 to 2015-16.

The paper says there has been a moderation in the trend component of the investment activity from 2011-12 onwards. “However, the cyclical component has shown upward movement from 2016-17, suggesting that recent improvement in investment activity is due to cyclical factors,” it says.

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