Investment for growth

Encouraging private investment stays a challenge

India’s growth momentum in its boom years of the 2000s came essentially from private-sector investment. Globally, gross fixed capital formation (GFCF) averaged between 23 per cent and 27 per cent in the past five decades. Outsize growth performers, such as China, have stayed consistently above that average, peaking at 45 per cent in 2013. Even today, China’s GFCF remains above 40 per cent. India has consistently been above average in terms of its investment rate as well. Today, it hovers at 29-30 per cent, which is well below the peak rates of 36-37 per cent achieved in the 2000s. The decrease is almost entirely due to a collapse in private investment, and thus restoring the rate of private investment in the economy should be a priority for policy.

However, it appears that whatever attempts have been made in this direction — including cleaning up the banks’ balance sheets and improving the ease of doing business, to name just two — have not necessarily achieved the desired ends. As this newspaper has reported, a recent report from Motilal Oswal Financial Services has pointed out that investment by the Indian corporate sector declined for two consecutive quarters now. In fact, in the first quarter this financial year, between April and June, it may have fallen over 6 per cent year on year. This is bad news precisely because the government is running out of options on how to push investment.

Other than the reform measures mentioned above, it has sought to up its own investment, whether directly through the Union Budget or indirectly through its public-sector enterprises. This has in part compensated for the failure of the private sector to step up. Capital expenditure by large central public-sector undertakings, or CPSUs, has reached 42.5 per cent of their annual target, and they are under pressure to reach 90 per cent by the end of the calendar year. The expansion and upgrade of India’s road and rail networks are being led through such public spending, delivered by the National Highways Authority of India and Indian Railways. This follows two successive years in which the capital expenditure component of the Union Budget increased by a third each year, with a large proportion of that going to the Railways among others.

Certainly, the upgrade and extension of India’s infrastructure network are an important target for public money. But the public sector simply cannot do all the heavy lifting in terms of investment. For one reason, private-sector capital investment is simply more efficient in terms of allocating capital than attempts by the public sector. But also, it is becoming clear that this scale of public-sector spending is simply unsustainable fiscally. Tax revenue is not rising fast enough to justify so much spending: In fact, in the first four months of this financial year, direct tax collection fell by 0.9 per cent. Given the high levels of public debt and the general government budget deficit, along with increasing demands on the Budget, the government’s capacity to push capital expenditure will be constrained, which could affect growth outcomes in the near to medium term. In this context, it may be worth examining why the public investment push is not attracting private investment in a big way.