India does well on investment front
The new millennium started with a slowdown in economy and
investment. A decisive turnaround in investment came in 2004-05. Since then
there has been no looking back, writes Dr. M.S. Kapadia.
Investment is a key to sustainability of economic growth,
apart from productivity as measured by capital-output ratio. Going by the
indicator of investment, India has done quite well. Thus, the gross capital
investment rate (gross domestic capital formation/gross domestic product at
current prices), which was at a low of 8.4 per cent in 1950-51 and around 9 per
cent average over 1950-51 to 1955-56, rose to 12-13 per cent average in the
later half of the 1950s due to emphasis on machines to build machines.
The country could not make any headway during 1960s due to some drought years
and the ratio remained stuck at 13-14 per cent over the decade. Investment
intensity stepped up to 18 per cent average in 1970s, with the last two years
witnessing the ratio rise to 20+ per cent.
The 1980s and 1990s saw a steady rise in the investment pace due to initiation
of reforms in 1980s and deepening and widening of reforms including those in
licensing requirements in 1990s (barring 1991-92 to 1994-95 that bore the deep
impact of forex crisis). The average rate scaled to 25 per cent during the
second half of 1990s, ending with 26 per cent on the eve of the 21st century.
The new millennium started with a slowdown in economy and the investment; the
investment rate slid to 23 per cent by 2001-02. Since then, the investment has
gathered steam and a decisive turn in investment intensity came in 2004-05 when
the ratio crossed 30 per cent mark to scale to 32 per cent. The 2005-06 and
2006-07 enjoyed further rise to around 36 per cent in the ratio of investment to
GDP at market prices. While the data for 2007-08 are not available, going by a
slowdown in GDP growth, investment rate could see a marginal decline.
Incidentally, investment has increased at a faster rate, relative to
consumptions, in last three-four years and this in conjunction with 8-9 per cent
robust GDP growth has catapulted the country at the centre stage in strategic
plans of MNCs.
While the country has done creditably on investment front, we cannot say the
same thing about productivity of capital. Thus, average output to capital
investment ratio declined from around 9:1 in the fifties to 4:1 by early 21st
century and sub-3:1 in investment buoyant years of 2004-05 to 2006-07. Here, it
may be noted that high investment dose relative to income generation
particularly over past five-six years, reflects massive investments into
low-income, high-gestation projects in urban/rural infrastructures, electricity,
roads, ports and railways, which after they get progressively commissioned are
sure to facilitate further income growth in future years.
GFCF by assets
Gross fixed capital (assets) formation, or investment (GFCF) was estimated at Rs
13.46 trillion in 2006-07; which is thrice the investment of Rs 4.56 trillion
seven years back. Mirroring the changing focus of projects investment from
industry to services and infrastructure, the share of construction in fixed assets investment increased to 54 per cent in 2006-07, from 43 per cent a
decade ago, while that of plant and equipment declined from 57 per cent to 46
On the one hand, the share of public sector in construction went down rather
steeply from 42 per cent in 1993-94 to 29 per cent by 2006-07; the private
corporate sector on the other upped its share from 8 per cent to 20 per cent.
This possibly mirrors increasing commitment by private corporate sector in
infrastructure building. The household sector, conceptually the residual sector
in macro data on ownership includes non-corporate business units. The segment
saw significant intra-period volatility in shares, but accounted generally for
around a half of the construction activities in the country.
Private corporates accounted for 62 per cent of plant & equipment buying in the
country in 2006-07; against 37-38 per cent in recent low-investment years of
2001-02 to 2003-04, when corporates had suffered a dip in earnings and
investment. While households have maintained their share at 20-21 per cent,
public sector has lost out to private corporates in plant investment, with its
share dipping to a low of 12 per cent in 2006-07. Buoyed by booming profits and
enormous investment opportunities under accelerating liberalisation, the private
corporates are on capex binge across a wide spectrum of sectors.
Gross fixed capital investment (GFCF) plus inventory change and addition to
valuables (which is not classified by ownership or industry) equals gross
capital formation (GCF). In addition, at aggregate level, conceptually the
difference between income and consumption expenditure (i.e. domestic saving)
plus foreign capital inflow is another measure of gross capital formation. A
part of this aggregate that can not be classified into assets or ownership is
defined as errors and omissions (E&O). In 2006-07, GFCF was Rs 13,465 billion,
inventory change Rs 961 billion, valuables Rs 497 billion and E&O Rs (-)45
billion, giving an unadjusted total GCF of Rs 14,878 billion.
GFCF by ownership
One of the major planks of the ongoing reforms is the truncated role of public
sector in economic activities. Reflecting a relative success in this area, the
share of public sector in projects investment eroded steadily from 40 per cent
in 1994-95 to 23 per cent by 2006-07. The decline was both in construction and
plant and equipment segments.
Private corporate sector investment trend could be split into good years of
1996-97 and 1997-98, followed by a prolonged slack in earnings and the resultant
constrained project investment till 2002-03 and a rebound in earnings and capex
over the subsequent four years. Thus, the share of private corporates in project
investment increased from 27 per cent in 1993-94 to 38 per cent in 1996-97, then
eroded gradually to 22 per cent in 2002-03 and sprang back to 39 per cent by
GCF by industry
One thing that clearly stands out from investment data by sector is the neglect
of agriculture, forestry and fishing, which could get only 7-9 per cent of capex
spending in the country (barring some low investment years when the rate had
worked out to 10-11 per cent). Starved of investment, agriculture on which
three-fifths of population depend for livelihood, has grown at just around 3 per
cent average in the first seven years of the 21st century - about one-third to
one-fourth the rate in non-farm sectors of industry and services, However,
giving some hope for future, the real GCF in farm sector has increased at
double-digit in 2005-06 and 2006-07, almost thrice the rate in earlier five
years. Incidentally, we had to take here GCF as GCFC data are not available by
The industrial sector comprising mining, manufacturing, construction and
electricity, too suffered gradual erosion in the share from a high of 57 per
cent in 1996-97 and 1997-98 to a low of 36 per cent in the low investment year
of 2001-02, though in 2005-06 and 2006-07, it recovered most of the losses with
the share rising to 56 per cent by 2006-07. Electricity, which has emerged as a
major constraint to high GDP growth, has found its share in capex slip from 12
per cent in 1993-94 to 6 per cent by 2006-07. Manufacturing too suffered share
erosion from 44 per cent average during 1995-96 to 1997-98 to a low of 30 per
cent in 2001-02, though the subsequent years have seen rebound with 2006-07
recording a share of 43 per cent.
In services, which gained in investment as in incomes, community, social and
personal services (including public administration) upped their combined share
in investment from 9 per cent to 15.2 per cent between 1993-94 and 2006-07. The
rise in investment under public administration was due to massive investment
under NHDP and other infrastructure projects through public exchequer. Transport
sector including storage and communication accounted for 8 per cent of GCF in
2006-07, trade and hotels 3 per cent and banking and insurance etc 12 per cent.
[May 19-25, 2008]