Indicus Analytics: Building blocks

Industry has seen an increase in fixed capital formation but productivity remains an issue

Capital accumulation is a major factor contributing to economic growth and the increase in fixed capital in industry is a key indicator for tracking progress. The Annual Survey of Industries (ASI) – the principal source of industrial statistics in India – provides data to assess changes in the growth and structure of registered units in the manufacturing sector.

During 2009-10, fixed capital in current prices rose 28 per cent at the all-India level compared to 25 per cent growth the previous year. In constant prices, with the base 2004-05, fixed capital rose 25 per cent in 2009-10 compared to 18 per cent the year before.

Reflecting the growth in fixed capital over the years, the ratio of fixed capital per worker has increased consistently from Rs 6.51 in 2000-01 to Rs 14.76 in 2009-10. On the other hand, the capital-output ratio, which measures the capital required to produce one unit of net output (net value added), had improved during the boom years, but increased from 1.98 in 2008-09 to 2.32 in 2009-10, indicating a slight decline in productivity.

State-level disparities, of course, abound since the structure of industry varies across states. Industrial groups with the highest fixed capital investment are basic metals, chemicals and chemical products and coke and refined petroleum products and the presence of these sectors shows up in the structural ratios of the states. In 2009-10, Gujarat, Maharashtra and Tamil Nadu topped with the highest levels of fixed capital — Gujarat had the highest share of aggregate fixed capital in India (17.7 per cent), followed by Maharashtra (14.6 per cent), Tamil Nadu (9.8 per cent), Andhra Pradesh (9.6 per cent) and Karnataka (7.1 per cent).(Click here for graph)

An inter-state comparison of some structural ratios shows that Orissa is largely dominated by capital intensive industries. The ratio of fixed capital per worker in Orissa is almost three times higher than that of the all-India figures. Also, in Jharkhand, Meghalaya, Chhattisgarh, Gujarat and Himachal Pradesh, capital worker ratio is far above the all-India average reflecting the dominance of capital intensive industries in the state. At the other end of the table, Manipur reports the lowest capital worker ratio. Also, Tripura, Kerala, Delhi, Punjab and Bihar are among those states with lower capital intensity, reflecting the structure of industry in these states. A comparison of capital productivity across states shows that the capital-output ratio is high in states dominated by capital intensive industries — Orissa, Gujarat, Andhra Pradesh and Meghalaya, for instance. However, West Bengal, Tripura, Karnataka and Chhattisgarh also had above average capital-output ratios in 2009-10.

Interestingly, Maharashtra had a much lower capital-output ratio than Gujarat in 2009-10, but fixed capital in Gujarat grew by 39 per cent, compared to a 10 per cent growth in Maharashtra, indicating large investments in the state that year.

It is noteworthy that though a high capital-output ratio is typically an indicator of low productivity, large investments tend to increase production only with a lag. The last few years have been turbulent for investment planning and there has been increased competition among states, making for a challenging investment environment ahead.

Indian States Development Scorecard, a weekly feature by Indicus Analytics, focuses on the progress in India and across the states on various socio-economic parameters. sumita@indicus.net