Private corporate investment in fixed assets and inventory accumulation (GCF) was up by 26 per cent to Rs 6.03 trillion during 2006-07 at current prices. The increase, however, was on the downward path, from over a decade high of 83 per cent in 2004-05 and 44 per cent in 2005-06. Prior to this, in the current millennium, corporate investment had plummeted 24 per cent in 2000-01, one of the leanest years for the economy in recent times, and recovered to 13 per cent average rise in the following two years and 24 per cent in 2003-04.
Gaining prominence of the corporate sector in the economy is one of the most noticeable developments of the ongoing liberalisation in current years. Thus, the share of corporate investment in the total investment was at single digit in the first eight years of 1980s; the share shot up in the boom years of mid-90s and scaled to 40 per cent by 1996-97. The subsequent four years of sagging corporate finance saw the share plummet to 21.5 per cent by 2000-01. Around 40 per cent of the country's investment in gross fixed asset and three-fifth of that in plant and machinery takes place in private corporate sector.
Gross savings (retained profits plus depreciation write-offs) of private corporate sector increased by 20 per cent to Rs 3.22 trillion in 2006-07, sliding from 30 per cent in 2005-06 and a peak of 70 per cent in 2004-05, the year of thriving profits. Looking back, gross savings have generally maintained an uptrend, though 1992-93 and 2000-01 and 2001-02, the two early years of the present century, showed declines, when compared with respective preceding years.
Private corporate business has traditionally been a deficit sector, with its investment requirements exceeding internally generated resources by a significant margin. External sources of funds comprise a plethora of routes including domestic and equity/debt floatations, loans, external commercial borrowings, trade credit etc. Internal finance accounted for 53 per cent of total capital finance during 2006-07. The share has tended to sag since 2003-04, when it had scaled to 68 per cent.
The share of gross savings in investment reached a peak of 74 per cent in 2000-01 when corporate profits fell 7 per cent and investment plummeted 24 per cent. The 83 per cent shoot-up in investment in 2004-05 was on the strength of 71 per cent buoyancy in profits. Also, it is observed that the impact of volatility in profits on investment is found in the same year or in the following year. Incidentally, running companies can access internal finance, but under-erection companies have to depend on external sources only for funds requirements.
Historically, the share of internal resources in corporate GCF has a tendency to move inversely with investment. Thus, the share of internal sources falls in years of spurt in investment and rises in lean years of investment This is because gross savings grow organically and any fluctuation in expectation-driven investment gets reflected in volatility (in the opposite direction) in the share of gross savings to GCF. In savings, while profits are volatile, depreciation maintains a more or less steady up-trend.
The investment and resource availability cycle in the economy has mirrored that in the corporate sector and the correlation, particularly in investment, has gone stronger in the present century (till 2006-07). Thus, total investment had reached a low in 2000-01, when corporate investment had declined 24 per cent and shot up 35 per cent in 2004-05 when the corporate investment boomed 83 per cent.
In addition to private corporates, non-departmental public sector units are also generating massive internal resources, with their gross savings accounting for around 11 per cent of total domestic savings in the economy and a little over half of private corporate savings in 2006-07. Their investment in gross fixed assets and inventory accumulation was around one-tenth of that in the economy, or around one-fifth in private corporate sector. We could not delve more into this segment for want of coherent data.
The total gross domestic saving (GDS) of Rs 14.41 trillion in the country in 2006-07 fell short of Rs 14.87 trillion gross domestic capital formation (GDCF). The gap was filled by foreign capital inflow, which was estimated at Rs 463.62 billion. The country has generally drawn on foreign capital (measured broadly as current account deficit in balance of payment) to supplement domestic savings to meet its investment requirement, barring some years like 2001-02 and 2002-03 when the current account was in surplus).