By R Gopalan & MC Singhi
India witnessed accelerated growth of GDP and capital formation during 1994-2008, with annual GDP growth averaging 6.6% and that of capital formation averaging 11.6%. But since 2011-12, GDP and capital formation growth have moderated to 6.1% and 5.0% (2011-2024). Further, the potential growth has moved around the current levels, primarily because of near stagnation in the investment/GDP ratio.
We also see a U-shaped long-term capital output ratio (COR) varying from an average of 4.1 during 1950-1991 to 3.9 during 1994-2008 and 5.9 during 2011-2024. We believe in the last three years, higher GDP growth at constant prices is because of a low deflator. The use of a double deflator could have resulted in a downward GDP growth and higher incremental capital output ratio (ICOR).
Post-reforms, it was expected that the private corporate sector and market-oriented public sector would make India a new manufacturing hub. Besides, services sector would get more oriented towards value added and professional services. Government investment was likely to have a lower share directly and it was to be more of a facilitator. The household sector was expected to benefit from an integration with new innovative manufacturing and service sectors and become more productive.
The growth would be based on productivity increase and capital intensity. Data, particularly since 2011-12, however, indicate that non-financial private corporates, the perceived engine of innovation and growth, has a stagnant share in gross capital formation though its share in gross value added (GVA) has somewhat improved.
The table reveals that: In Overall GVA growth has fluctuated under two distinct phases: one of decelerating growth post-2016-17 and until Covid associated with structural changes in the economy and pandemic; and another post-Covid with a better recovery.
The gross capital formation (GCF)/GDP ratio has been more stable post-2013-14. But growth momentum has been maintained due a lower ICOR, particularly post-Covid. While there has hardly been any significant change in productivity or capacity utilisation, the decline in ICOR is surprising.
It could be a medium-term phenomenon post-Covid, recovering to a normal pattern. Private NFC sector has witnessed an increase in GVA, particularly post-Covid, perhaps due to sluggish micro, small, and medium enterprises (MSMEs), but their share in GCF has moderated from the peak in 2016-17. This may also be due to lower medium-term ICOR, gradually recovering to pre-Covid averages.
Generally, share in GVA and GCF reveals an increasing ICOR of NFCs and decreasing ICOR for the household sector. A stagnant share in capital formation and higher share in GVA indicates less competition and more monopoly.
The GCF/GVA ratio of the private corporate sector is sticky. Capacity utilisation of 75% hints at insufficient demand and excess capacity. Second, an Reserve Bank of India (RBI) survey shows the inventory-to-sale ratio has increased. Commodities are going off the shelves slower, raising holding costs. Third, a higher concentration index reveals that oligopolies are too satiated to invest further as competition is less and innovation is lacking.
An RBI study of listed NFCs indicates profits growing faster than sales from FY16 to FY25, with internal accruals accounting for an average of 88% of their incremental investment in the last seven years as against under 65% in 2011-13. It indicates that while the balance sheet is important for institutional support for both oligopolistic firms and MSMEs, credit support to the latter is more important.
In fact, access to credit by major industries has declined from over 35% of the total non-food credit by commercial banks during 2011-17 to 15% in 2024-25, a decline to an extent offset by internal resources, mutual funds, and insurance firms. Compared to an average non-food credit growth of 11.8% during 2011-2015, the credit growth of major industries just averaged 4.3%. More worrying is that the growth in GCF is likely to remain moderate as confirmed by the ministry of statistics and programme implementation’s first-ever forward-looking survey on private sector capex investment intentions. The survey reveals a likely decline of nearly 25% in the private corporate sector’s aggregate investment intentions in 2025-26.
The household sector has been able to maintain its share in GCF after reforms such as the goods and services tax, as well as demonetisation and the pandemic, all of which were viewed as adverse for it and MSMEs. Increasing investment, therefore, owes neither to pro-corporate sector reforms nor an accommodative monetary policy. For the household sector, it is the access, not cost, that is more important. The sector is the critical driver of innovation, investment, and gainful employment, whose growth requires intervention.
The authors are former civil servants.
Disclaimer: Views expressed are personal and do not reflect the official position or policy of FinancialExpress.com. Reproducing this content without permission is prohibited.
