Better numbers in private projects

Source- The post is based on the article “Better numbers in private projects” published in the “Business Standard” on 29th May 2023.

Syllabus: GS3- Indian economy and growth

Relevance- Investment in the Indian economy

News– The article explains the recent trend of investment growth in the Indian economy and its implications for the economy.

What is the role of the state and financial entity in the economy?

State is a small part of the economy. Almost all output and jobs are made in the private sector. State actions create incentives for private people to invest.

In this fundamental sense, public policy is not a game of muscular action in the economy. It is the game of establishing conditions in which the private sector will engage in investment in the economy.

Similarly, the financial system should best be seen as creating conditions for non-financial firms to build the economy. Policy and finance are the means to achieve vibrant growth.

What are indicators for measuring investment in the economy?

One measure of investment activity is the year-on-year growth of net fixed assets (NFAs) of large non-financial firms. This is data about the annual flow of investment by large firms. NFA growth has declined steadily from about 25% real in 2007-08 to about 0% real in 2021-22.

A good leading indicator of investment is found using the CMIE capex database. It tracks all large investment projects. The methods for the database have been consistently in place from 1995 onwards.

All clear projects with a distinct name are measured in the database. It shows up in various disclosures by the firm and by the state.

What is shown by investment indicators related to the stock of value of private projects under implementation?

It has declined from 2011-12 onwards. Things have now changed.

It was at its bottom in 2020 at a value of about 47 trillion. There was a slow recovery from 2020 and a sharp gain in early 2023. The latest value is at around 55 trillion. It is 17% real above the bottom. The long decline has reversed.

This is an important positive change in Indian economic conditions. The present value of the stock of private investment is far low as compared to the peak value of 2011. But, it is back to the levels last seen in 2018.

What do macroeconomics say about multiplier impacts of demand generation?

A demand impulse generates a multiplier effect. Increased private investment impacts the entire economy. Increased purchases and employment generate greater demand.

This triggers many good responses. These are greater borrowing, greater purchases of durable goods, greater investments in business plans, and non-workers transitioning into unemployment.

Could the present optimism related to high investment can lead to significant recovery?

Under the macroeconomics aggregate lies a lot of things. Some firms are faring well and some firms are collapsing.

The limitations of firm resolution in India have led to the excessive survival of impaired organisations. The rising investment of recent quarters may lift all the firms.

The upsurge in private projects under implementation should reflect an upsurge in investment in the NFA data.

The upsurge in the flow of investment expenses should trigger a significant scale of the “multiplier effect” gains in demand and employment?

The modest macroeconomic recovery should lead to broad-based investment and high growth rate.