The high-pitched India growth story is based on mistaken interpretation of surge in gross capital formation (GCF) in private corporate sector (PCS) during 2004-08 (see table).
The high-pitched India growth story is based on mistaken interpretation of surge in gross capital formation (GCF) in private corporate sector (PCS) during 2004-08 (see table). Rapid accumulation of capital does strengthen the potential manufacturing growth rate, output, export, employment, productivity. Post-2008, dismal outcome on these accounts contradicts supposedly accelerated accumulation of productive capital. Annual average manufacturing IIP growth was 3% during FY2009-15 and 4% in FY2012-18 (both base 2011-12) despite growth steps like New Manufacturing Policy 2011 (projected growth 12-14%), Make-in-India, etc. Manufacturing exports share declined from 80% in FY2000 to 61% in FY2011. In dollar terms, non-oil exports CAGR was 6% during 2008-17. These show PCS-GCF was overestimated and so also the growth.
Why overestimation of PCS-GCF?
The computation of PCS-GCF on flow of funds (FoF) basis rather than the nature of its actual use led to overestimation of PCS-GCF. It seems PCS invested most sub-PLR credit and external borrowings in high-interest bearing bulk deposits and other financial investments. Fixed deposits (FD) of PCS with banks increased by an incredible CAGR of 48% during 2004-08. Concomitantly, CAGR of PCS-GCF was 43%. With inverse relation, both cannot surge concurrently. The share of PCS-FD to total FD in banks increased from 5% in FY2003 to 15% in FY2008.
RBI’s annual study of financials of sample non-government public limited companies shows steady decline in gross fixed assets to total assets (72% in FY2003 to 57% in FY2008) while financial investment increased. This was corroborated by RBI’s study of financials of 765 companies over 2003-12 (FSR, December 2013). FSR June 2014 also underscored financialisation of corporates. It found that top 10 corporates’ financial income was more than top 10 banks’ treasury income in FY2013.
The High-Level Committee on Estimation of Savings and Investment, 2009, found that share of investment in financial assets and bank deposits as a proportion of total uses of funds rose respectively from an average of 11.3% and 2.6% in the 1990s, to 19.2% and 7.4% during 2000-07, displacing share of funds used in gross fixed assets. CSO’s estimation of PCS-GCF is based on extrapolation of FoF of RBI’s sample companies. RBI’s gross fixed capital data of sample companies and FD data are actual and factual, whereas CSO data is based on assumption that funds inflows into PCS are used for GCF. In reality, circular FoF between banks and PCS bypassed GCF.
Oblivious of this, 12th Plan Working Group on ‘Estimation of Investment, its Composition and Trend’, Planning Commission mistakenly explained wide gap between PCS’s GCF and GFCF in terms of an incredible seven-fold rise in inventory build-up over 2004-08. RBI’s sample companies’ financials show marginal decline in share of inventory in total assets.
There was a surge in sub-PLR lending by banks. Its share in total lending (excluding small and export loans) surged from 28% in FY2002 to 76% in FY2008. Banks’ size-wise credit outstanding above Rs 25 crore rose with a CAGR of 30% during 2004-08. The unprecedented surge in total bank credit and deposits was facilitated by circular FoF between banks and PCS. The share of financial assets in PCS’s total assets steadily rose. PCS became a big lender and investor. It’s a case of perverse financialisation/bank credit intermediation impairing overall capex and real growth.
Crucial reasons for PCS financialisation and low capex include (1) massive sub-PLR lending and high interest-bearing bulk deposits provided arbitrage advantages, (2) appreciation of the rupee from Rs 48.4 per dollar in FY2003 to Rs 40.2 in FY2008, (3) decline in weighted average basic import duty rates—22.4% in FY2003 to 9.5% in FY2008, and (4) underinvoiced/misdeclared/smuggled and incentivised-export by China made manufacturing uncompetitive. Numerous existing units became sick or converted to traders-in-Chinese goods. These discourage capex, encourage financialisation. It impacts working of both real and financial sectors. Excessive sub-PLR lending to a set of corporates led to over-leveraging. Excessive funding led to high investment in sister concerns and siphoning-off of funds.
CAGR of Chinese imports was 52% in 2003-08 even with underinvoicing/misdeclaration. The real increase must be quite higher. Here onwards begins unbridled import of all types of goods from China backed by dubious ways. This is corroborated by the 145th report of Parliamentary Standing Committee on Commerce. Make-in-India is overwhelmed by Made in China. Unequal competition kills incentive for capex. In reality, this was not that golden growth period. The foundation for perverse financialisation and decline in fortunes of manufacturing was laid during this period.