Investment: The Next Big Story

Source: The post is based on the article “Investment: The Next Big Story” published in The Times of India on 9^th June 2023.

Syllabus: GS 3 – Indian Economy – Growth & Development

Relevance: About the factors behind increasing investment rates

News: The article explains factors behind the increasing investments rates in India.

What is investment and what are its impacts?

At an aggregate level, investment refers to spending by economic agents (households, private corporations and government) on creation of capital assets.

In the short run, investment influences GDP via the transactional impact of generation of capital assets while in the longer run, it boosts the productive capacity of the economy and increases overall efficiency.

What has been India’s investment story?

India’s share of investments in GDP (investment rate) peaked at 35.8% in 2007-08, while it dropped to 27.3% in 2020-21 due to the pandemic.

However, the investment rate has recovered to 29.2% in 2022-23. Further, the investment rate attained a level of 31. 7% on a standalone basis during January-March 2023, the highest in the last 35 quarters.

What caused the rise in the investment rate?

First, the government implemented counter-cyclical fiscal policy to support the economy when the private sector withdrew due to uncertainty.

The government’s budgetary capital spending has jumped from its pre-Covid level of 3.6% of GDP in 2019-20 to 4.9% of GDP in 2022-23, the highest since the Global Financial Crisis in 2008.

Second, the government has tried to retain focus on long term macro-stability while announcing structural measures to revive investments.

For example, the National Infrastructure Pipeline, National Monetisation Programme, Gati Shakti, etc. has attempted to improve the business climate.

Third, with the RBI’s intervention, the twin balance sheet syndrome, which was a burden on both the corporate sector as well as the banking sector, has now improved.

As per CMIE data, the non-financial sector’s debt has declined sharply from 16.8% in 2020-21 to 10. 7% in 2022-23. This has helped boost profitability in the corporate sector.

This improvement has translated into better asset quality for the banking sector. As per RBI data, the gross NPA ratio of all scheduled commercial banks reduced from 11.2% in FY18 to 5.0% in September 2022.

Fourth, Normalisation of economic activity after the pandemic has also pushed up investments.

Fifth, geopolitical preference of ‘China Plus One’ strategy has benefited countries like India, Vietnam and Bangladesh in attracting and boosting investments.

Sixth, input price inflation has shown signs of moderation. For instance, the price of the Brent crude oil has decreased from the previous year. This decline would help lower WPI inflation.

What can be the way ahead?

The global economic downturn and strong tightening of interest rates over the last year have created near-term cyclical headwinds. These factors may temporarily slow down the pace of investment rate.

However, according to the IMF, India has had one of the strongest post-Covid gains in investment rate, and it likely to outperform peer groups in the long run. Therefore, we can continue to expect the investment rate to increase further.