Post-pandemic, climate change will drive investments

Source- The post is based on the article “Post-pandemic, climate change will drive investments” published in “The Indian Express” on 3rd June 2023.

Syllabus: GS3- Economy

Relevance- Investment related issues

News-Three years after the pandemic and despite 8% average growth over the last two years, the level of India’s GDP is still running 5% below its pre-pandemic trajectory.

Many would argue that, as in the aftermath of the 2008 global financial crisis (GFC), the post-pandemic trend growth is likely to be lower, and thus, this is an artificially high benchmark.

What are the facts and figures related to growth and investment of the Indian economy prior to the global financial crisis and its aftermath?

In the five years prior to the GFC, India’s average growth rate was 8%. Rapid globalisation boosted exports and private investment increased to set up the needed supply chains. Since the GFC, global trade and investment are languishing.

Corporate investment was 14.5% in 2007-08. But after the GFC, corporate investment has stabilised around 10.5% of GDP.

Household investment rose to 15.7% of GDP by 2011-12. It declined to 9.4% of GDP by 2015-16 and has recovered to just over 11.5% of the GDP today. A large part is due to falling SME investment, which is subsumed in this category.

Overall public sector investment has remained broadly unchanged at 7% of GDP since the GFC. It is 1% lower than its peak before the crisis.

The rise in central government capital spending has been offset by lower PSU investments. State government investment has remained roughly unchanged.

The 4-5% of GDP decline in overall investment since 2011-12 is reflected in growth outcomes. GDP growth has averaged 6% since the GFC. It is slightly better at 6.7% if the post-pandemic years are excluded. These outcomes are similar across other economies.

The last two years’ average growth of 8% does not indicate the medium term trajectory of growth. It’s just a recovery from the around 6% contraction in 2020.

What are the various reasons to believe that investment will be boosted in the near future despite pandemic related disruptions?

The first relates to the relocation of global supply chains. One type of relocation is the “China + One” shift. Firms are locating part of their new supply chains outside China as an insurance against pandemic-type disruptions.

In this type of relocation, economies such as India, Mexico, and Vietnam will benefit from more FDI and expansion of manufacturing exports. But, these economies do not have the capacity to absorb more than a limited scale of relocation investments.

For example, despite all concerns China, get inward FDI flows of $524 billion over 2021-22. It is about $100 billion more than in the two years prior to the pandemic. Over the same period, total FDI into India was $95 billion.

Thus, “China + One” relocation will be beneficial to some. But, it is unlikely to be “game changing”.

The second type of relocation is related to re-shoring, near-shoring, or friend-shoring. This is based on security concerns of the West in locating supply chains related to emergent technologies. It will be in countries in their “circle of trust”.

Even if EM economies have the ecosystem to establish the advanced supply chains, only a few such as Korea, Mexico, and Poland Would belong in the circle-of-trust. Security-driven relocation will be firmly set within the developed world.

The other reason for more investment in the post-pandemic world is climate change. The world is moving towards a lower carbon way of life.

The investments required to achieve this will be massive. The private sector will necessarily have to play a big role.[Text Wrapping Break]