Domestic issues pull down project investment

The decline in project investment in fiscal 2013, the first year of the 12th Five-Year Plan which has targeted over $1 trillion spend on infrastructure projects, was caused primarily by domestic developments which has made India Inc. wary of committing huge capex in projects with long gestation. Dr. M.S. Kapadia, Director, Economic Research India Pvt. Ltd, analyses the current project investment scenario in India.

Project investment, as measured by domestic fixed capital formation, has dropped to the decade’s lowest rate of 1.7 per cent during fiscal 2013, according to CSO’s Provisional Estimates. More worryingly, this was the second year of erosion in the rate: the fixed assets investment had earlier plummeted from 13.4 per cent in fiscal 2011 to 4.4 per cent in fiscal 2012 and even during fiscal 2009, when the economy was mauled by global meltdown, India had managed to up its investment by 3.5 per cent.

The rot in project investment, in fiscal 2013, the first year of the 12th Plan that has targeted to spend over $1 trillion only on infrastructure projects, was caused primarily by domestic developments: there was comprehensive paralysis in reforms and clearances, governance fell to a new low, and policy actions were fewer, halting and confusing.

Deterred by possible action from corruption allegations, bureaucrats preferred to stay away from taking decisions even where they were badly needed and PSU executives opted to play safe by refraining from announcing big capex plans even where they had huge cash pile-up.
Private sector was confused on long-term perspective as there was lack of policy guidance, made worse by several flip-flops in existing policies, which together with falling profitability made India Inc. wary of committing huge capex in long gestation projects.

Indicative of the magnitude of a lacking investment, the ratio of gross fixed capital investment to GDP at market prices, broadly the investment intensity of the economy, fell to 33.2 per cent during the year, from 33.7 per cent in fiscal 2012 and 34.3 per cent in fiscal 2011. When taken with the deceleration in GDP growth from 9.3 per cent to 5 per cent between fiscal 2011 and 2013, the phenomenon has raised qualms about the validity of India growth story and its emergence to the centre of global policymakers. At this point, we may note that the early months of calendar year 2013 has seen some action on speeding up key infrastructure projects; these have not yet found reflection in hard number.

GFCF by type of asset
According to detailed data, construction part of fixed capital investment increased 5.3 per cent during fiscal 2012, exceeding 3.4 per cent in machinery; yielding an overall fixed capital investment rate of 4.4 per cent for the year. While these details are not available for fiscal 2013, it would appear that the overall increase of 1.7 per cent in fixed capital investment pertained to construction only, with machinery investment probably showing stagnation or a decline. In this context, it may be noted that construction income has increased 4.3 per cent and IIP of capital goods production has shown a drop during fiscal 2013.

Taking a longer period, construction rose faster than machinery investment in the second half of the 1990s with its share in fixed capital investment crossing 50 per cent on the turn of the century. The share rose more rapidly thereafter to scale to 55+ per cent during fiscal 2005 and 2006. However, the share fell to around 52 per cent in subsequent two years and to 51 per cent average in next two years as the focus of investment got shifted to industrial projects (including power plants) where machinery investment forms a much larger share, as against construction which dominates in real estate and infrastructure projects. The share of construction fell a little in fiscal 2011, but recovered to 51 per cent in fiscal 2012. In terms of macro data from CSO, corporate sector plays a major role in plant and machinery investment, but not in construction where households (including non-corporate private business units) and public sector are major players.

GFCF by ownership
One of the major planks of reforms is the truncated role of public sector in economic activities. Reflecting relative success in this area, the share of public sector in project investment eroded steadily from 40 per cent in 1994-95 to 24-25 per cent from 2004-05 through 2007-08. The share increased to 26 per cent in fiscal 2009, but resumed downtrend in subsequent years to reach 23 per cent in fiscal 2012.

Private corporate investment enjoyed good share during 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 five years period that ended 2007-08. 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 23 per cent in 2002-03 and sprang back to a peak of 42 per cent by 2007-08.

However, the following year 2008-09 saw capex plans of private corporates hit badly due to dwindling profits, with their share in the pie dropping to 34 per cent. Interestingly, the drop in the share of private corporate sector during the year was offset mainly by household sector that includes non-corporate private business units whose share shot up from 31 per cent to 39 per cent during the year. The next three years saw a recovery in share to 37 per cent by fiscal 2011 with a slight fall to 34 per cent the following year. Going by indications, the share of private corporates in GFCF should have further declined during 2012-13.

GCF
Gross fixed capital investment (GFCF) plus inventory change and addition to valuables (which is not classified by ownership or industry) equals gross capital investment (GCF). In addition, at aggregate level, conceptually there is another measure of gross capital formation which measures the difference between income and consumption expenditure. A part of this aggregate that cannot be classified into assets or ownership is defined as errors and omissions (E&O).

In fiscal 2012, at 2004-05 prices, GFCF was Rs.18,973 billion, inventory change Rs.1,287 billion, valuables Rs.1,334 billion and E&O (-) Rs.276 billion, giving an unadjusted total GCF of Rs.20,318 billion. By the way, valuables like gold, diamond and silver ornaments have increased fivefold between fiscal 2005 and 2013, much faster compared to threefold increase in GFCF.

GCF by industry
One thing that clearly stands out from investment data by sector is the neglect of agriculture, forestry and fishing. The share of farm sector investment in total investment slid to 7 per cent by 2007-08, from around 10 per cent average between 1999-00 and 2002-03. Though fiscal 2009 saw the share perk up to 8 per cent, it was more due to subdued industrial investment.

The farm sector share in capital investment declined to a new low of 6.6 per cent during fiscal 2011 even as the subsequent year saw the share increase to 7.2 per cent due to double-digit increase in farm sector investment. Nevertheless, over a longer period, starved of capital investment, the farm sector on which around three-fifth of population depends for livelihood is still monsoon driven in the country. By the way, we had to take GCF (excluding change in valuables) in capital investment here as GCFC data is not available by industry.

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 subsequently the share increased to 43 per cent average in 2002-03 and 2003-04, 48 per cent average during 2004-05 and 2005-06 and a high of 54 per cent during 2007-08. The following recession-hit 2008-09, however, saw the share drop back to 43 per cent with a partial recovery in share to 50 per cent by 2010-11. Fiscal 2011-12 has seen the share fall to 44 per cent and fiscal 2013 is likely to see the share fall further.

Services, which have gained enormously in incomes, found their composite share in investment go down from 53 per cent in 2001-02 to around 39 per cent by 2007-08, though the subsequent year saw the share rise to 49 per cent more due to subdued industrial investment. The share of service sector investment in total GCF worked out to 48 per cent during 2011-12.