Share of investment in GDP to hit all-time low in FY20: Advance estimates

Share of investment in gross domestic product will shrink to an all-time low in financial year 2019-20 (FY20), official data released on Tuesday showed. This comes at a time when Prime Minister Narendra Modi gas reached out to India Inc urging it to spend. 

In fact, India’s investment activity growth is also estimated to touch a 17-year low in FY20. With overall demand not showing signs of revival, investment activity may take longer to recover, economists said.

Gross fixed capital formation (GFCF), a proxy for investment, will grow by one per cent in FY20, down from around 10 per cent in the previous fiscal, according to advance estimates released by the central statistics office. This suggests that GFCF will witness a 0.5% contraction in the second half of the fiscal. The earlier low was (-)0.72 per cent in FY03. The share of investment in overall GDP is estimated to fall to 28.1 per cent, which is the lowest ever based on the back series data available. In FY03, share of investment in GDP was 28.3 per cent.

Pronab Sen, former chief statistician of India, said confidence among investors was still missing and government spending on infrastructure projects with quick turnaround time could revive investment. “Where investments are concerned, they are always based on forward looking point of view. You need a certain degree of confidence that there will be returns. That confidence is missing. In a situation where demand is collapsing day by day you cannot expect investors to pump in money,” said Sen.

Finance Minister Nirmala Sitharaman had announced last week that Rs 1.02 trillion worth of infrastructure projects will be implemented in the next five years as part of the government’s spending push. 

Sen said it will not help much immediately because of high gestation period of such projects. “Government needs to spend on projects with quick turnaround period,” he said.

Private final consumption expenditure, an indicator for demand, is estimated to see growth fall to 5.8 per cent in FY20 from eight per cent last year. “The slowdown especially in private consumption to 5.8 per cent in FY20 from 8.1 per cent in FY19 has taken the sting out of FY20 GDP growth because this alone constitutes the 57.4 per cent of total GDP. Ind-Ra believes even advance estimate of 5% GDP growth is not sacrosanct,” said Sunil Sinha, of India Ratings.  “...The assumption relating to private consumption looks somewhat unrealistic if festival demand is taken as an indicator,” he added. 

PM Modi reached out to India Inc on Monday, urging them to invest. “At the beginning of the new year, today from this platform, I will again tell Indian industry not to let disappointment linger. Go ahead with new energy. Whichever corner of the country you go to, for your expansion, the government will walk with you.”