Analysing Investment Trends in India
By Rajesh K P,
(Image source: DNA India)
Private investment plays a significant role in a capitalist economy. Capitalist economies that are growing are really concerned about the amount of investment that flows in. India with its stunning growth rates after embracing the global order saw a rise in investment from the household sector as well as from private institutions. Understanding growth and understanding policies to promote growth also involve an understanding of investment — how it is formed and what factors control it. There are theories of investment trying to explain why economies behave the way they are. The unpredictable nature of global economy makes the debate over the ‘most suitable’ theory interesting. We will see the part played by investment in the Gross Domestic Product (GDP) of India during its growth years. We will also inquire whether we should focus on investment, given the signs of GDP growth slowing down (MoSPI 2018). Keeping that in mind, a sneak peek at policy suggestions that
could bring about some changes would be worthwhile. Do we carry a risk in endorsing those policy suggestions as some on the other side of market-based growth seem to suggest?
Gross Fixed Capital Formationover the Years
Investment, also called Gross Capital Formation (GCF), consists mainly of three components, namely Gross Fixed Capital Formation (GFCF), Change in Stocks (CIS) and the number of valuables (Gold etc.). A major component of this is GFCF and we can see that post globalisation there was a surge in GFCF as a percentage of GDP. GFCF to GDP ratio was 30.7 per cent in 2004 and it peaked at 35.81 per cent in 2007 (MoSPI 2018) . From then it started decreasing further, going down to 28.22 per cent in 2016. In the last two years this trend has slightly reversed, and the reported percentages are 28.66 and 28.87 respectively. In comparison with China, which has maintained its GCF at 40 per cent of GDP (Bank 2019), India seems to be slightly behind purely in terms of investment’s role in the economy.
This decline in total investment is accompanied by a decline in household investments. Household investments play a major role in the Indian economy and there is a marked decrease in household investments in recent years. The household sector’s share in total investment stood at 15.95 per cent in 2012 which fell to 9.09 per cent of GDP in 2017. There is a significant decline in the investment in dwellings and buildings which fell from 12.85 per cent in 2012 to 6.77 per cent in 2017. This will have a cascading impact on steel and cement sectors, apart from its obvious impact on the construction business (Patnaik and Pandey 2019).
Facilitating Investment
Capitalist economies focus on facilitating investment to aid economic activity and further growth. Indian economy expects a lot of activity in the infrastructure segment in the coming two decades. For an emerging economy like India, triggering economic activity also means larger investment in infrastructure. A large portion of Indian household savings take the form of bank savings. There are restrictions on the banks to channel this money into investment in various sectors. Banks have to lend according to the priority list and have to restrict themselves within the quota requirements for each sector. This means 18 per cent in agriculture and 7.5 per cent for Micro, Small and Medium Enterprises (MSME). Banks are also mandated to deposit in Government Securities and maintain a Cash Reserve Ratio as mandated by the RBI.
As banks have to finance infrastructure projects within these restrictions, this is seen as a growth hindrance by some economists who argue for further deregulation and removing restrictions (Patnaik and Pandey 2019). Those who argue for further reforms in the banking sector advocate for privatising banks and strengthening the bond markets to facilitate this. Inclusive banking is seen as another way to improve the household savings. Bringing more households into the banking arena has the potential to achieve this.
Bond Markets or Risky Investments?
Bank lending suffers from Non-Performing Assets (NPAs). NPAs stood at 11.5 per cent as per RBI’s financial stability report in March 2018. This has declined to 9.3 per cent in March 2019 (Reserve Bank of India 2019). However, this high number is a cause of concern for the banks. Despite this worrying factor, Indian investors have paid a lot of faith in public sector banks and trusted the public banking system backed by the government. Even the Punjab National Bank scandal did not trigger a panic withdrawal despite Nirav Modi allegedly causing the bank huge losses. Most of the NPAs in public sector banks are accounted by corporate borrowers. Their inability to pay back stems from the slowdown in the external global market. Given this context, the claim of privatisation becomes a puzzle, since by doing so we are potentially exposing our household savings into an uncertain and risky global market. Should the government pressurise the corporates to pay back the loans or attach their assets to recover the loans, or should it let the private players take the ownership of these
banks as well would be an interesting debate.
Another major policy argument is building a robust bond market and removing the restriction on insurance and pension funds to invest in bonds. At present, pension and insurance funds can be invested in AAA rated bonds and there are policy advocates who call for relaxing this further (Patnaik and Pandey 2019). This would increase the risk on those who invest in pension funds and insurance. Also, this exposes our household savings to certain investments which could turn bad and cause a crisis. But given that the government is more focused on remaining fiscally disciplined and keeping its fiscal deficit further low, it would not be keen to borrow more. Government could rely on private investments and push for reforms in bond markets to attract more investment through that route to finance infrastructure development. Whether this risk would pay off or could expose us to global financial crisis like the ones happened in 2008, only time will tell.
References
MoSPI, Govt of India. 2018. National Account Statistics. New Delhi: Govt of India. Patnaik, Ila, and Radhika Pandey. 2019. Savings and Capital Formation in India.National
Institute of Public Finance and Policy. https://www.nipfp.org.in/publications/working-
papers/1866/.
Reserve Bank of India. 2019. Financial Stability Report 2019. New Delhi: Reserve Bank of India
The World Bank. 2019. World Bank Data portal. https://data.worldbank.org/indicator/NE.GDI.TOTL.ZS?locations=CN.
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