Modi government inherits eroding project investment

The Indian economy expanded 4.7 per cent during fiscal 2013-14 which, though nominally better than 4.5 per cent in fiscal 2012-13, marks the second year of sub-5 per cent economy growth—a low that has not occurred for over a quarter century.

The drag on the economy came mainly from mining and manufacturing, which declined during the year, after stagnation in 2012-13, 7+ per cent in 2011-12, and 8+ per cent in 2010-11. In fact, before the global meltdown year 2008-09, which too by the way was not as bad as the last two years, the segment had grown at solid double-digits average for three years, making possible “India on the rise”.

In mining, coal, iron ore, petroleum crude and natural gas were on the downhill, whereas in manufacturing, capital goods (due to lackluster project investment) and consumer goods (due to slowing incomes) suffered blocks.

Electricity, gas and water supply fared better with 5.9 per cent (2.3 per cent) rise, which was mainly due to good southwest monsoon and resultant strong hydropower. Monsoon-driven agriculture, forestry and fishing (+4.7 per cent) fared better than 2012-13 (+1.4 per cent), but the feat was below that in the previous two years.

Among the services that have tended to outpace commodity sectors, trade, hotels and transport are experiencing slowdown due to overall decline in rate of agriculture and industry. Their consolidated growth rate has fallen from solid double-digits average for eight years till 2010-11 (barring a little dip in 2008-09) to 5 per cent average in 2011-12 and 2012-13, and 3 per cent in 2013-14. This would imply that finance, business services, personal services and government administration are supplying muscle to economic growth in recent years.

Incidentally, retarding employment-intensive commodity sectors and trade, hotels and transport, which get business from commodity sectors, must have led to a significant loss in employment potential in the economy. This calls for urgent remedial measures from the government to set the sectors back on growth path.

On expenditure side of the economy, private final consumption expenditure slowed from 5 per cent to 4.8 per cent, whereas the fall in the pace from 6.2 per cent to 3.8 per cent in government final consumption expenditure was steeper due to tighter control over government expenditure. Investment in valuables like gold and silver largely in household sector declined 32 per cent during the year; this was the first decline since 2005-06 in this volatility-marked item.

Declining project investment
Project investment, as reflected in gross fixed capital formation, declined in 2013-14, after stagnation in the preceding year. The investment intensity of the economy as measured by GCFC/GDPmp declined to 32.9 per cent, from 33.9 per cent in 2012-13 and 35.3 per cent two years ago. By available indications, the fall in GFCF was largely in industry and in plant and machinery.

In anecdotal evidence of slowing project investment, capital goods production has been on the decline for past three years and machinery import is on the decline for last two years. Similarly, real income in construction industry has stagnated and project cost index, as measured by the ERIL Index of Cost of Project Inputs, has remained almost static in last two years.

The investment targets for the 12^th Plan that is programmed to spend over $1 trillion in infrastructure need to be reappraised in light of the sorry state of affairs in project investment in past two years. The Modi government would have to initiate policy execution related measures for creating an investment-friendly climate for enticing private sector investment, as also make doubled-up efforts to remove bottlenecks to project implementation in order to shorten construction period and add to supply of goods and services from commissioned projects expeditiously.

The size of the domestic market in terms of GDP at current market prices is placed at `114 trillion for 2013-14, or around $1.95 trillion at current rupee-dollar rate, in the provisional estimates of annual national income released for the year by Central Statistics Office, Ministry of Statistics and Programme Implementation, Government of India.