THE GIST of Editorial for UPSC Exams : 24 August 2019 (Increasing investment to stimulate growth (The Hindu))

Increasing investment to stimulate growth (The Hindu)

Mains Paper 3: Economy
Prelims level: Gross Fixed Capital Formation
Mains level: India’s present economic slowdown concerns

Context

• India’s current economic slowdown is due to a combination of two underlying trends.
• First, there is the short-run cyclical slowdown exhibited by a number of high-frequency indicators, reflecting a significant fall in demand, especially for sectors such as automobiles, consumer durables and housing.
• Second, there is the more serious long-term fall in investment and savings rates. Raising growth requires that attention be paid to both cyclical and structural dimensions of the problem.

Fixed capital formation

• When it comes to the Gross Fixed Capital Formation (GFCF) relative to GDP at current prices, a steady fall has been visible since 2011-12, when it was 34.3%. By 2017-18, it had fallen by 5.7% points, to a level of 28.6%.
• Assuming an Incremental Capital Output Ratio (ICOR) of 4, this meant a fall of nearly 1.4% points in the potential growth rate.
• The fall consisted of sectoral decreases in the household, private corporate and public sectors (as indicated in the table).
• It is noticeable that the fall in the household sector’s investment rate got arrested by 2015-16.
• However, by then, the rate had already fallen by 6.3% points. From 2016-17, the sector’s investment rate even showed some recovery.
• In contrast to the household sector rate, the private corporate sector investment rate did not show any fall up to 2015-16 when, at 11.9%, it was in fact higher than the corresponding rate for 2011-12 (11.2%). It fell in the subsequent years, but only by 0.7% points. This near-constancy runs counter to what industry leaders have been saying and what other data sources such as CMIE indicate, casting some doubts on the veracity of the figures.
• In the case of the public sector, the rate fell by 0.3% points between 2015-16 and 2017-18.
• Thus, the period from 2011-12 to 2017-18 can be seen as consisting of two parts: 2011-12 to 2015-16, when the household sector investment rate fell sharply; and 2015-16 to 2017-18 when the investment rates of the private corporate and public sectors fell marginally.

Fall in household savings rate

• The Gross Domestic Savings Rate also fell between 2011-12 and 2017-18 by 4.1% points, from 34.6% of GDP to 30.5%. However, this fall was entirely due to the household sector, with the private corporate and public sectors showing increases in their savings rates by margins of 2.2% points and 0.2% points, respectively.
• This differentiated sectoral pattern of investment and savings rates had significant implications for the financing of investment.
• Throughout the period from 2011-12, the savings rate of the private corporate sector increased, reducing its dependence on the surplus savings of the household sector. While the excess of private corporate sector’s investment over its own savings rate was 3.8% points of GDP in 2011-12, the gap fell to 0.5% points by 2017-18.
• At present, all the surplus savings of the household sector is available for the public sector.
• With private corporate sector’s investment demand being largely met by its own savings, public sector’s borrowing requirements can be fully financed using the surplus from the household sector, supplemented by net inflow of foreign capital without any fear of crowding out.

Requirement for critical policy challenges

• In 2018-19, the real GDP growth rate was 6.8%.
• A countercyclical policy should increase growth rate to its current potential of 7%-7.5% and then structural reforms should raise the potential growth itself to above 8.5% if India is to attain a size of $5 trillion by 2024-25.

More capital expenditure

• From the monetary side, reducing the repo rate by a cumulated margin of 110 basis points in 2019 has not as yet induced a noticeable growth response.
• Complementary fiscal stimulus, in the form of additional public sector investment, may prove to be more effective.
• However, given the fiscal deficit constraint, there is limited flexibility for increasing centre’s capital expenditure directly.
• In the 2019-20 budget, this is estimated to be 1.6% of GDP. There may be some expansion, if additional dividends from the Reserve Bank of India (RBI) flow to the government.
• Further, there may be some possible additional disinvestment. However, care should be taken to deploy all of these additional funds for capital expenditure.
• Normally, the prescription to meet slowing demand is to increase government expenditure.
• In the current situation, there can be an increase in government expenditure but it has to be directed towards an increase in investment expenditure.

Conclusion

• A similar effort may be made by State governments and non-government public sector enterprises to increase capital expenditures.
• All these measures may also crowd in private investment.
• Thus, this fiscal push, together with the already-initiated monetary stimulus, may help raise the growth rate.
• Another area that needs immediate attention is the financial system, which must be activated to lend more.

  Online Coaching for UPSC PRE Exam

  General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) Which of the following country is the largest manufacturer of two-wheelers, three-wheelers and tractors in the world?
a) France
b) Germany
c) USA
d) India

Correct Answer: D
Mains Questions:
Q.1)What kind of attention needs to be paid to both cyclical and structural dimensions of India’s present economic slowdown?