Themes > Current Issues
24.02.2003
Declining Domestic Investment
C. Rammanohar Reddy
It is a
measure of the loss of credibility of India's once-renowned official
statistics machinery that high or low the Central Statistical
Organisation's projections of the growth rate of the Indian economy, the
CSO is criticised for the quality of its estimates of the gross domestic
product (GDP). In February 2001 and 2002, the CSO was faulted for
presenting an overly optimistic picture of the state of the economy in
its advance estimates of GDP growth in 2000-01 and 2001-02. Now in
February 2003, it is being criticised for painting a supposedly
unwarranted negative picture of economic performance in the current
fiscal 2002-03. As things subsequently turned out, the CSO was not very
much off the mark in 2001 and 2002 with its advance estimates of GDP
growth. It is possible then that the CSO will be proved correct this
time round as well.
The disbelief that has greeted the CSO's projections of a GDP growth of just 4.4 per cent in 2002-03 is on account of two related factors. One is the familiar reason of wanting to shoot the messenger. The economy is supposed to be picking up momentum — booming exports, rising foreign exchange reserves, competition in telecom and the national highway project are supposed indicators of an economy on the move. The CSO's latest projection flies in the face of such "feel good" news. A GDP growth rate of just 4.4 per cent knocks India straight out of the league of the "world's fastest growing economies", to which the country was said to belong. This low growth rate in the first year of the Tenth Plan also makes an advance burial of the Planning Commission's wishful target of an average 8 per cent growth during 2002-07. And if the economy is expanding by only a little over 4 per cent this means the NDA Government has been in office during two of the three years in the past decade when GDP growth has slipped below 5 per cent.
The second reason why the CSO's projections are being viewed with such scepticism is that we have very quickly forgotten the dire predictions made in August and September last year when it was apparent that the 2002 monsoon had spread niggardly amounts of rainfall over most of the country.
Predictions then of a plummeting growth rate quickly faded from official and public memory since inflation did not rear its head (as it traditionally has during drought years) and official agencies continued to project a relatively rosy outlook for the economy in 2002-03. Indeed, the Mid-Year Review of the Economy that the Finance Ministry presented as recently as December 2002 spoke of a resilience in the economy and even suggested that it may grow by 5 to 5.5 per cent in 2002-03 and that the agriculture sector would record a one per cent growth rate in this drought year.
Now it looks like that this so-called resilience just does not exist. First, while agriculture may now account for just a third of India's GDP; a bad crop year can push the economy down since neither industry nor services appears capable of making up the slack. Second, all that expenditure on protective irrigation and drought-proofing has not helped. One bad monsoon and the grain output falls to its lowest level in seven years and oilseed production to its lowest in 15 years. Value-added in agriculture and the allied sectors is expected to contract in 2002-03 by 3.1 per cent, a vastly different picture from that presented in the Finance Ministry's mid-year review.
It is of course quite possible that the States' inflated demands for drought relief and the Agriculture Ministry's acquiescence to such demands have influenced the size of the agricultural harvest in 2002-03 as contained in the `second advance estimates' which in turn have affected the CSO's estimates of the performance of the agriculture sector this year. (Remember how the Union Agriculture Minister's claim of "the worst drought in a century" turned into "the worst drought in 25 years", finally settling down to "the worst drought since 1988-89", all over the course of a couple of months?) But rapidly emptying reservoirs, falling ground water levels and inadequate compensation of the kharif crop shortfall by the rabi crop are sure indications that any exaggeration in the severity of the drought of 2002 is only a matter of minor degree. The plain and simple fact is that the economy is not doing particularly well, whatever the modest revival that has been taking place in certain sectors of manufacturing.
Unfortunately, the signs — irrespective of the 2003 monsoon — are not very good of any remarkable change in economic fortunes in 2003-04. The drumbeats of war from the U.S. form only one negative factor. The problems afflicting the Indian economy essentially boil down to a single one — a lack of adequate investment, especially by the private corporate sector. A forgotten piece of information in the welter of statistics that have been put out in the past fortnight is the continued decline in the rate of investment in the economy — in spite of a rise in the domestic savings rate. Total investment in the economy, or gross capital formation, went down from 24 per cent as a per cent of GDP in 2000-01 to 23.7 per cent in 2001-02, the second successive year of a decline. Gross capital formation is now at its lowest level since 1998-99 and in only three years over the past decade has the rate of investment in the economy been lower than in 2002-03.
Instead of adding to domestic investment, the Indian economy is exporting capital to the rest of the world, which is what is shown by the excess in the rate of savings over that of investment. This is, of course, the other side of the current account surplus in the balance of payments that the economy recorded in 2001-02 and is likely to do so in 2002-03 as well. Of the three main components of domestic investment, household investment is growing and public sector outlays are holding their own, but it is private corporate investment that has slipped. This is in continuation of the trend of recent years of the rate of private corporate investment declining in the economy.
The modest acceleration in industrial growth that we have been witnessing appears to be largely on account of a higher public/Plan investment outlay over the past year. It is certainly not on account of exports, because the 'boom' the export statistics now show is an artificial one.
This is largely an over-invoicing of exports as firms big and small bring back funds earlier stashed away abroad. Yet, the Finance Ministry in all its wisdom has decided to more or less freeze the Centre's gross budgetary support for the Plan in 2003-04 at this year's level. This means that the one stimulus that has been available for growth is being removed. There surely cannot be a more short-sighted approach.
It is of course true that Plan outlays are by definition not necessarily productive. It is of course also true that the productivity of new investment matters just as much as the volume of capital formation. But at a time when business expectations and confidence continue to be dull, it is surely more important to boost domestic investment than to pursue the holy grail of fiscal belt-tightening.
The disbelief that has greeted the CSO's projections of a GDP growth of just 4.4 per cent in 2002-03 is on account of two related factors. One is the familiar reason of wanting to shoot the messenger. The economy is supposed to be picking up momentum — booming exports, rising foreign exchange reserves, competition in telecom and the national highway project are supposed indicators of an economy on the move. The CSO's latest projection flies in the face of such "feel good" news. A GDP growth rate of just 4.4 per cent knocks India straight out of the league of the "world's fastest growing economies", to which the country was said to belong. This low growth rate in the first year of the Tenth Plan also makes an advance burial of the Planning Commission's wishful target of an average 8 per cent growth during 2002-07. And if the economy is expanding by only a little over 4 per cent this means the NDA Government has been in office during two of the three years in the past decade when GDP growth has slipped below 5 per cent.
The second reason why the CSO's projections are being viewed with such scepticism is that we have very quickly forgotten the dire predictions made in August and September last year when it was apparent that the 2002 monsoon had spread niggardly amounts of rainfall over most of the country.
Predictions then of a plummeting growth rate quickly faded from official and public memory since inflation did not rear its head (as it traditionally has during drought years) and official agencies continued to project a relatively rosy outlook for the economy in 2002-03. Indeed, the Mid-Year Review of the Economy that the Finance Ministry presented as recently as December 2002 spoke of a resilience in the economy and even suggested that it may grow by 5 to 5.5 per cent in 2002-03 and that the agriculture sector would record a one per cent growth rate in this drought year.
Now it looks like that this so-called resilience just does not exist. First, while agriculture may now account for just a third of India's GDP; a bad crop year can push the economy down since neither industry nor services appears capable of making up the slack. Second, all that expenditure on protective irrigation and drought-proofing has not helped. One bad monsoon and the grain output falls to its lowest level in seven years and oilseed production to its lowest in 15 years. Value-added in agriculture and the allied sectors is expected to contract in 2002-03 by 3.1 per cent, a vastly different picture from that presented in the Finance Ministry's mid-year review.
It is of course quite possible that the States' inflated demands for drought relief and the Agriculture Ministry's acquiescence to such demands have influenced the size of the agricultural harvest in 2002-03 as contained in the `second advance estimates' which in turn have affected the CSO's estimates of the performance of the agriculture sector this year. (Remember how the Union Agriculture Minister's claim of "the worst drought in a century" turned into "the worst drought in 25 years", finally settling down to "the worst drought since 1988-89", all over the course of a couple of months?) But rapidly emptying reservoirs, falling ground water levels and inadequate compensation of the kharif crop shortfall by the rabi crop are sure indications that any exaggeration in the severity of the drought of 2002 is only a matter of minor degree. The plain and simple fact is that the economy is not doing particularly well, whatever the modest revival that has been taking place in certain sectors of manufacturing.
Unfortunately, the signs — irrespective of the 2003 monsoon — are not very good of any remarkable change in economic fortunes in 2003-04. The drumbeats of war from the U.S. form only one negative factor. The problems afflicting the Indian economy essentially boil down to a single one — a lack of adequate investment, especially by the private corporate sector. A forgotten piece of information in the welter of statistics that have been put out in the past fortnight is the continued decline in the rate of investment in the economy — in spite of a rise in the domestic savings rate. Total investment in the economy, or gross capital formation, went down from 24 per cent as a per cent of GDP in 2000-01 to 23.7 per cent in 2001-02, the second successive year of a decline. Gross capital formation is now at its lowest level since 1998-99 and in only three years over the past decade has the rate of investment in the economy been lower than in 2002-03.
Instead of adding to domestic investment, the Indian economy is exporting capital to the rest of the world, which is what is shown by the excess in the rate of savings over that of investment. This is, of course, the other side of the current account surplus in the balance of payments that the economy recorded in 2001-02 and is likely to do so in 2002-03 as well. Of the three main components of domestic investment, household investment is growing and public sector outlays are holding their own, but it is private corporate investment that has slipped. This is in continuation of the trend of recent years of the rate of private corporate investment declining in the economy.
The modest acceleration in industrial growth that we have been witnessing appears to be largely on account of a higher public/Plan investment outlay over the past year. It is certainly not on account of exports, because the 'boom' the export statistics now show is an artificial one.
This is largely an over-invoicing of exports as firms big and small bring back funds earlier stashed away abroad. Yet, the Finance Ministry in all its wisdom has decided to more or less freeze the Centre's gross budgetary support for the Plan in 2003-04 at this year's level. This means that the one stimulus that has been available for growth is being removed. There surely cannot be a more short-sighted approach.
It is of course true that Plan outlays are by definition not necessarily productive. It is of course also true that the productivity of new investment matters just as much as the volume of capital formation. But at a time when business expectations and confidence continue to be dull, it is surely more important to boost domestic investment than to pursue the holy grail of fiscal belt-tightening.
© MACROSCAN 2003