The 2018 economic survey had recommended an urgent prioritisation of investment revival to arrest its impacts on growth.
As the slowdown is particularly centred in the informal sector, policies need to be recalibrated to specifically address this problem.
What is the current investment scenario?
While investments in the economy peaked 11 years ago, a slowdown started 5 years ago, and has currently become severe.
The slowdown in private investments in India is now well recognized and is visible chiefly in the informal sector and lesser felt in the corporate sector.
Notably, financial stress on company balance sheets and the severe bad debt problem hindered big ticket corporate investments only briefly in 2014-15.
Subsequently, corporate investments had picked up but private investments in the informal domain have been largely stagnant.
Informal Sector - It has been estimated by NSSO that about 6.34 crore unincorporated non-agricultural enterprises exist.
These often operate out of homes, typically employ less than 10 workers and do contribute a considerable chunk of the private investments
As informal enterprises are one of the principle engines of growth, the slowdown in the sector is delaying a full economic recovery.
The fall is so severe that the government’s macroeconomic stimulus by increased public investments hasn’t been able to compensate for it.
Why is the informal sector more vulnerable?
Consuming households tend to be net savers, while the government, corporates and unincorporated enterprises are net debtors.
Competition for Funds - A major chunk of saving are held with banks, insurance companies, from which the net debtors borrow from.
When government borrows considerable sums to finance its deficits, it reduces the lending potential of financial institutions due to a smaller fund pool.
Hence, while the big corporates can still access capital from the remaining or through the bond/share market, the informal enterprises get left out.
Notably, informal sector does not have the resources required to access credit from diverse sources and is left to depend on extoritionist money lenders.
What caused the present situation?
The government had increased its spending in the aftermath of the global economic slowdown to provide an economic stimulus.
This saw a surge in fiscal deficits, which had to be serviced by borrowing.
Concurrently, banks that were already stung by the bad loan problem, have been played safe by lending generougly to government projects.
Along with all this, the recklessness of some states governments also seems to have crowded out the informal sector from formal credit avenues.
As a consequence, there has been a cut back in private informal sector investments due to lack of sufficient credit.
What needs to be done?
Given the anatomy of the private investments slowdown, a macroeconomic stimulus may not be the best policy choice.
Urgent fiscal deficit reduction, quick clean-up of the bad loans mess, and restoration of banks’ health are more likely to revive private investments.
The current credit policy seems skew in favour of the visible and large organised enterprises, which needs to be corrected.
Recognising the credit needs of the unorganised sector is hence crucial.
