Investment rate tipped to rise to 29% of GDP on government spending

The investment rate is tipped to rise to 29 per cent of the country's GDP in 2019-20, a trifle better than the four-year high of 28.9 per cent achieved in the last fiscal. 

A report by CARE Ratings shows investments would be fuelled by government spends on infrastructure. The report is not too optimistic on private sector investments reviving despite the ceasing of political uncertainty. Private investments, though, are expected to pick up with a lag and government policies would catalyse the uptick in private investments.

Investment sentiment in the country continues to be subdued. Although investment rate touched a four-year high of 28.9 per cent in FY 2019, it was still lower than 34.3 per cent in 2011-12. 

Investments were also helped by a rise in the capacity utilisation rate of businesses (based upon RBI’s capacity utilization  survey) from  73.1 per cent in 2017-18  (annual  average) to 75.9 per cent in Q3 of 2018-19. These numbers, which are based on a sample  of companies, are however a bit difficult to reconcile with the low Index of Industrial Production (IIP) growth witnessed during the year. “A rise in capacity utilisation prompts fresh investments. Investments have been tended to be sustained by higher government/public spending. Private  investment continues to  be  restrained primarily on  account  of lower  demand and  financial  constraints. Political uncertainty has also been a factor that limited private investments during the last two months”, the report added.

The domestic economic growth output with GDP growth, according to advanced estimates by Central Statistical Organisation (CSO) is pegged at 7 per cent, implying a five-year low.

The study ascribes the moderate growth to weakness in  consumption  demand and continued subdued  private investment activity. Private  consumption, which  has  been  the  mainstay  of  the  Indian  economy, has  been  impacted by prolonged periods of low income growth coupled with the liquidity issue in the aftermath of the NBFC crisis from Q2FY19 onwards which constrained  availability of funds for producers, as well as, consumers. Economic  growth during the year was supported partly by exports and higher government spending towards infrastructure building.