Services likely to lead growth in gross fixed capital formation: Care

The Reserve Bank of India and investment banks such as Goldman Sachs are betting on a revival in private investments in Asia's third-largest economy

India’s dominant services sector is not called the economic engine without reason.

The sector, which accounts for about 55.2 per cent of gross value added, is likely to lead growth in gross fixed capital formation -- a measure of investment spending -- that had remained subdued in the last couple of years, according to an analysis by Care Ratings Ltd.

The Reserve Bank of India and investment banks such as Goldman Sachs Group Inc. are betting on a revival in private investments in Asia’s third-largest economy to boost growth from an expected four-year low. But gross fixed capital formation has fallen to 28.5 per cent of gross domestic product in the year to March 2018 from 34.3 per cent in the 2012 financial year, according to Care Ratings.

“Quite clearly the level has to be increased,” Care Ratings said, pegging the desired rate at above 30 per cent to bring about accelerated growth in the economy. “Higher investment in capital is more likely to be scattered and concentrated in the relatively higher growth sectors and will not be all-encompassing.”

The study showed healthcare, information technology, banking, telecom, retail and ship-building had the highest growth rates of investments between the financial years 2012 and 2017. But their share was dwarfed by the total amount of capital poured into telecom, power, oil, steel and banks, which together attracted 72 perc ent of the investments.

Care Ratings said a combination of high inflation, a slowdown in incomes and banks wary of lending because of rising soured loans have hit investments. High real interest rates are also a reason investments are being held back. That’s affected capacity utilization in the manufacturing sector, which was in the region of 70-72 percent -- well below the 78-80 percent threshold considered good for the economy, according to Care.

“The regime of low interest rates may have ended as they are poised to increase or at best remain unchanged this year,” Care said, adding that “growth in demand and better capacity utilization would be the clue to higher investment in manufacturing.”