Economic Slowdown and Investment

What is the issue?

The current economic slowdown is much due to the slump in investment in the country.
Here is an overview of this factor, and an analysis of the ways to boost investment.

Why is investment a unique factor?

Investment, unlike consumption, satisfies no immediate want.
So, business groups investing today are basically taking a bet on the future, when it would start yielding returns.
Such bets are a function of the “state of confidence” at the time of investment.
In that case, the investor has to be reasonably certain about the prospective yields, based on present knowledge of the future.
The longer the time horizon the more uncertain would be this knowledge.

What is its relevance to the current economic slowdown?

India’s economic slowdown is evident now because of consumption spending clearly falling, be it on cars or 'Rs 5 biscuit' packs.
However, the crisis goes back longer, from the time companies stopped investing.
It is an investment that takes form as expenditures of others and in turn, fuel further consumption and income generation.
Clearly, investment is what creates jobs and incomes.
As this flow of incomes from hand to hand expands the market, the “state of confidence” for businessmen to invest also goes up.
This positive business sentiment thus reinforces the virtuous cycle.
Thus, a good indicator of “state of confidence” is new investment proposals.

How is the recent “state of confidence”?

The “state of confidence”, according to the Centre for Monitoring Indian Economy, was Rs 20 lakh crore in 2015-16.
It fell to Rs 16.2 lakh crore, Rs 11.4 lakh crore and Rs 10 lakh crore in the following three fiscals.
During April-June this year, new projects announced amounted to a mere Rs 74,000 crore, against Rs 3,45,000 crore in the same quarter of 2018-19.

What does this indicate?

The stalling of the growth engine started from around 2015-16.
Business confidence did revive in the initial 2 years of the Narendra Modi-led government.
[The new project proposals may, however, not have scaled the high spirits of 2006-07 to 2010-11 period.]
However, subsequently, there has been a steep drop with the new investment announcements in 2018-19.
This was even below those during the last 2 years of the previous regime (2012-13 and 2013-14).

What is the implication of this?

The low investor confidence has spilt over now to consumers as well.
When investments dry up and there is no jobs creation, with existing employees also being laid off, people’s confidence to spend takes a hit.
The slowdown, thus, becomes visible and the earlier virtuous cycle is affected.
It is instead replaced with a vicious downward spiral of contraction in consumer spending, incomes, jobs and investment.

How could this be addressed?

Consumers will not spend unless they feel confident about jobs and incomes.
Clearly, addressing the above problem cannot happen through consumption.
So, asking banks to reduce interest rates is unlikely to make people take loans to buy homes or vehicles.
What is desperately needed now is reviving the investment cycle.

How can investment be boosted?

Investment, as already noted, is a function of confidence about prospective yields from capital expenditures incurred today.
Any investment is limited by the size of the market it caters to.
In the current situation, the private sector is unlikely to commit to any significant investment for a considerable period.
So, it would require some other player, with a truly long-term investment time horizon, for boosting investments.
The government/public sector can be the only possible option here.
E.g. China; in 1990, China’s annual per capita GDP, at $318, was lower than India’s $368, as per World Bank data
But in 2018, China’s per capita of $9,771 was nearly five times India’s $ 2,016.
This happened on the back of an investment-driven growth model; the state-owned enterprises invested heavily.
By this time, China’s GDP had soared from $361 billion to $13.6 trillion.
[India’s has gone up from $321 billion to $2.7 trillion between 1990 and 2018].

What lies ahead for India?

The government should be able to risk a further slippage in its fiscal deficit targets.
Nextly, public sector undertakings should have the necessary project execution ability and managers of good calibre.
Going forward, land acquisition and statutory clearances are other challenges to tackle.
In all, India should find all means to do more public investment, especially in the given situation.

Source: Indian Express