High rates hit Investment, but numbers don't show

High interest rates have hit investment, though the statistical numbers seem promising in the first quarter of this financial year as compared to the previous one.

Gross fixed capital formation (GFCF), which can be taken as a proxy for the investment rate, rose to 7.88 per cent in the first quarter of this year against just 0.37 per cent in the fourth quarter of 2010-11.

This may show the investment scenario in the April-June quarter was not so bad. However, economists say the figures in the fourth quarter of 2010-11 were low due to a high base effect. Also, the growth in GFCF in the first quarter of this financial year was down from 11.08 per cent in the corresponding period of 2010-11.

Pronab Sen, principal adviser, Planning Commission, said, “Investments have certainly slowed, which contributed to the slower GDP growth.” GDP grew by 7.7 per cent in the first quarter of 2011-12, against 8.8 per cent in the first quarter of last year. Sen attributes the slower GFCF growth in the fourth quarter of 2010-11 to the high base effect. “The fourth quarter of 2009-10 was a very unusual quarter, where investments were robust,” he said. GFCF grew 19.47 per cent in the fourth quarter of 2009-10.

According to Madan Sabnavis, chief economist, CARE Ratings, investments declined due to the interest rates going up. He felt growth would be impacted if capital does not grow at the same rate as output. “If there is no capital formation, the stocks get depleted, and if fresh capacity is not created, it would create a big problem in case demand picks up,” he added.

Sen does not see investment reviving soon. The economic slowdown would be extended to next year, according to Sabnavis, as there is a gap between capital formation and output.

According to the YES Bank report on the first quarter GDP, the exceptional, albeit one-off, 37.7 per cent growth in capital goods in the Index of Industrial Production (IIP) in June is the primary reason for the high 7.9 per cent GFCF. In addition, a downward revision to last year’s investment growth to 11.1 per cent from 17.4 per cent earlier, also partially explains the resurgence in investments.

“But, definitely there is a slowdown in investment growth, as input costs are rising and global economy is fragile. Investment would take a while to ramp up,” said Shubhada Rao, chief economist, YES Bank.

Anis Chakravarty, senior economist, Deloitte, Haskins and Sells, felt investment growth had definitely slowed.

“The global economy scene is negative and it will impact investments,” he said.