Saturday, January 29, 2022

India’s world-beating growth hides troubled investment trend

Gross Fixed Capital Formation is less than a third of India’s GDP

India has made a strong comeback from the pandemic and is set to claim the fastest growing economy in 2021 and perhaps even 2022. The government’s latest estimates are for a 9.2 percent expansion in the fiscal year ending March. The International Monetary Fund forecasts growth to fall to 8.5 percent next year, but even at that slow pace, India is expected to outpace all major economies.

While the headline numbers are impressive, they hide a disturbing trend. Gross fixed capital formation, a measure that includes investments in physical assets ranging from plant and equipment to bridges and roads, accounts for less than a third of GDP, according to World Bank data. In China, it is over 40 percent. Reserve Bank of India Governor Shaktikanta Das remarked in early December that private investment was “still lagging”, which could jeopardize the recovery in aggregate demand.

There is a broad consensus among economists that India needs to increase that number to ensure sustainable recovery. Motivated by the risk of downgrading India’s sovereign debt rating to junk, the government is discontinuing its pandemic stimulus. And while the central bank kept interest rates low, even as inflation ticks higher in 2021, economists polled by Bloomberg are predicting a hike of 60 basis points this calendar year.

An increase in demand for homes that were forced to lay off during the two waves of the Covid-19 infection will help dampen growth, but will fade as the year progresses. “The two pre-Covid drivers—private consumption and government spending—will not grow at the same pace,” says Nikhil Gupta, chief economist at Motilal Oswal Financial Services Ltd. “So the only potential driver is private investment, which hasn’t shown a strong pickup yet.”

Despite efforts by Prime Minister Narendra Modi’s government to revive it, including Make in India, a program launched in 2014 to encourage companies to set up factories, investments have been low for nearly a decade leading up to the pandemic. was happening. Yet for many investors, the labor and land rights issues that hindered such projects overwhelm the incentives.

An initiative unveiled in 2019 that earmarked $1.9 billion for infrastructure projects through public-private partnerships was laughable. Then the pandemic struck.

The government launched a new program in 2020 that provides cash payments to companies meeting production targets in industries such as electronics, pharmaceuticals and auto components. In case companies need any further stimulus, India’s Reserve Bank cut the benchmark interest rate to a record low of 4 per cent at the start of the pandemic, where it remains.

So why are businesses reluctant to invest? Among the possible explanations, demand remains fragile in many regions, as well as uncertainty about the impact of a new wave of infections.

Yuvika Singhal, economist at QuantEco Research in New Delhi, calls it a chicken-and-egg situation: “From a macroeconomic perspective, only when the recovery in consumption looks sustainable can we see the investment cycle turning decisively,” she says. says.

There are indications that the pandemic may have triggered a two-pronged economy. While formal employment is on the rise, rural India’s vast informal economy continues to struggle, with the demand for jobs available through government aid and employment guarantee programs still high. If about two-thirds of the population does not have the means to buy biscuits, shampoos and two-wheelers, many companies may hesitate to invest.

“Sustainability will continue to be the key challenge,” says Kunal Kundu, an economist at Societe Generale GSC Pvt Ltd. “While the clearest ever K-shaped recovery and the concomitant rising inequality helped drive consumption in some regions, aggregate demand is likely to remain muted – especially compared to the level seen two years ago.”

,

Nation World News Deskhttps://nationworldnews.com
Nation World News is the fastest emerging news website covering all the latest news, world’s top stories, science news entertainment sports cricket’s latest discoveries, new technology gadgets, politics news, and more.
Latest news
Related news
- Advertisement -