Getting households to invest again is absolutely critical for an investment-demand revival
There is a strong relationship between GDP and investment growth. GCF as a percentage of GDP crossed the 30% mark for the first time in FY05 and reached 38.0% in FY08. It grew at an average rate of 26.7% over FY05-FY08, before dropping to 5.4% in FY09 due to the 2008 global financial crisis. GCF growth recovered to 20.9% in FY11 and 15.3% in FY12 due to government stimulus. However, it could not sustain the momentum thereafter due to a variety of reasons such as policy paralysis, regulatory hurdles, adverse market conditions, etc.
The government has taken several steps over the past few years to stimulate investment demand in the economy, but the effort so far has not produced any tangible result. No doubt, the current macro environment is challenging, but are we pressing the right button to revive the investment cycle?
A sectoral view
A glance at the NAS data reveals that maximum investment during FY12-FY16 was in real estate, ownership of dwelling and professional services. Its average share in the total investment during FY12-FY16 was 26.3% (CAGR: 5.8%), followed by manufacturing 18.0% (CAGR: 1.3%). Despite tepid investment growth, these two sectors together accounted for 44.3% of the total investment in the economy.
On the other hand, sectors such as ‘trade, repair, hotels and restaurants’ (CAGR: 18.0%), ‘financial services’ (11.8%) ‘public administration and defence’ (10.3%)—all recorded double-digit growth during FY12-FY16, but their combined share in the total investment was only 18.1%. This indicates that reviving investment demand in ‘real estate, ownership of dwelling and professional services’ and manufacturing sectors is important for reviving the investment cycle in the economy. This is not to say that other sectors are not important but to emphasise the fact that an overwhelming proportion of investment demand in the economy originates from these two sectors alone and both are witnessing muted demand. Moreover, since they have significant backward/forward linkages with other sectors, policy support to these two sectors is imperative for a broader revival of investment demand in the economy.
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Investment by economic agents and asset class
If we scan the NAS data in terms of asset classes, it reveals the obvious: that the share of ‘dwelling and other building structure’ at 55.8% in the total investment was highest during FY12-FY16. This was followed by machinery and equipment at 34.4% and the remaining share was distributed between intellectual property products (IPP, 9.6%) and cultivated biological resources (0.2%). Although the share of IPP and cultivated biological resources together in the total investment is still less than 10%, the emergence of these two categories and rising share of IPP in investments over the years indicate a new trend—investment in R&D. With competition intensifying investment in strategic R&D, filing of IPP rights are rising. Companies Act 2013, sensing this new trend, has now allowed incorporation of a new type of company called ‘dormant company’, which could be used to hold IPP rights with no significant financial/accounting transaction.
Further dissection of NAS data shows that the share of households in total investment during FY12-FY16 was highest (at 40.5%), closely followed by private corporations (at 37%). The share of general government and public sector corporations was way behind at 11.3% and 11.1%, respectively. As expected, 82.6% of the household investment was in ‘dwellings, other buildings & structures’. Of the remaining, 17.0% was in ‘machinery & equipment’ and 0.5% in ‘cultivated biological resources’. All these asset classes held by the households witnessed negative growth during FY12-FY16. On the other hand, during FY12-FY16 private corporations had 52.4% of their total investment in ‘machinery & equipment’, followed by ‘dwellings, other buildings & structures’ (25.1%). The share of different asset classes in the investments of public sector corporations during FY12-FY16 is broadly similar to that of private corporations. In case of general government ‘dwellings, other buildings & structures’ accounted for 75.4% of their total investments during FY12-FY16, followed by ‘machinery & equipment’ (21.2%).
Although aggregate fixed investment grew at a CAGR of 4.2% during FY12-FY16, a disaggregated view tells a slightly different story. Due to a capex push, while government investments grew at a CAGR of 11.6%, contrary to the general belief, even the private corporations’ investments grew at a CAGR of 9.1% during this period. In fact, the setback to investment growth came from the household sector whose investment contracted by 2.2%. It appears that a sustained high inflation coupled with adverse macro environment impacted households investments more than the private and public investments.
Given that the share of general government in the total investments is only 11.3%, a more nuanced approach to policy-making is required to revive the investment cycle which is currently focussed on government capex alone. Getting households to invest again therefore is absolutely critical for an investment demand revival. This also means added policy focus on real estate and ownership of dwelling where most of the household investment flows, besides creating an environment for acceleration of private corporations’ investment.
Devendra Kumar Pant is chief economist and Sunil Kumar Sinha is principal economist, India Ratings and Research.
Views are personal