Weighing in on India’s investment-led revival

Source: This post is created based on the article “Weighing in on India’s investment-led revival” published in The Hindu on 25^th July 2022.

Syllabus: GS Paper 3 – Economy – Issues related to growth and development

News: Recently, India’s Finance minister addressed third G20 Finance Ministers and Central Bank Governors (FMCBG) meeting. She said that India’s long-term growth prospects are embedded in public capital expenditure programmes. Thus there is a need to analyse trends in government’s investment policies and their impacts.

The phases of Public investment-led economic growth in India

India’s post-Independence economic growth was led by the public investment.

During Asian financial crisis of 1997, the then government initiated public road building projects. These projects led to an investment and export-led boom in the 2000s.

The project were Golden Quadrilateral (to link metro cities using a high-quality road network) and the Pradhan Mantri Gram Sadak Yojana (to ‘provide good all-weather road connectivity to unconnected habitations’).

However, in 2010s, real Gross Fixed Capital Formation (GFCF) rate declined, which saw a rise to 32.5% in 2019-20 from a low of 30.7% in 2015-16. This trend continued even during pandemic years.

Between 2014-15 and 2019-20, the shares of agriculture and industry in fixed capital formation/GDP fell from 7.7% and 33.7% to 6.4% and 32.5%, respectively. Whereas the share of services rose from 49% in 2014-15 to 52.3% in 2019-20.

What are the present issues in the present Public investment-led economic growth strategy?

The budgetary definition of investment refers to financial investments. It include purchase of existing financial assets, or loans offered to States. Thus, it is not just capital formation representing an expansion of the productive potential.

The National Accounts Statistics suggests that over 90% of Gross Capital Formation (GCF) consists of fixed investments. However, the productive potential of investment depends on its composition.

Within the service sector, although investment in roads and communications rose, but declined in industries and agriculture. There is a need for balance between “directly productive investments” (in farms and factories) and infrastructure investments.

Although a good amount of time and resources were dedicated to improve ease of doing business in India under ‘Make in India’ campaign. However, it didn’t result in a boost to industrial investment, let alone foreign investment.

The contribution of foreign capital to financing GCF fell from 3.8% in 2014-15 (or 11.1% in 2011-12) to 2.5% in 2019-20.

The lack of domestic capacity for essential raw industrial materials and capital goods could prove costly.