Is investment recovery far away?

Of the two "sustainable engines" of exports and investment for rapid economic growth – as per the Economic Survey 2017-18 – the investment engine, which has seen a "pronounced, albeit gradual" decline over the last five years, will need a lot of cranking up.

The Survey, which was released on Monday, has dedicated an entire chapter titled 'Investment and Saving Slowdowns and Recoveries' to this issue and tries to study the nature of their slowdowns and how to resuscitate growth.

Interestingly, the survey finds that India's investment rate – investment to GDP ratio – slowdown was "unusual" as so far it was relatively moderate in magnitude, long in duration, and started from a relatively high peak rate of 36% of GDP.

Specifically, the investment rate slowdown was related to balance-sheet problems; "In other words, many companies have had to curtail their investments because their finances are stressed, as the investments they undertook during the boom have not generated enough revenues to allow them to service the debts that they have incurred".

It is this fact that the downhill trend of investment rate was linked to the corporate balance-sheet troubles, which may pose a big challenge, according to the survey.

"Investment declines flowing from balance-sheet problems are much more difficult to reverse. In these cases, investment remains highly depressed, even 17 years after the peak, whereas in case of non-balance-sheet slowdowns the shortfall is smaller and tends to reverse," reveals the survey.

The data put out by the survey, which has been carried out by a team of economists headed by chief economic advisor (CEA) Arvind Subramanian, shows that the ratio of gross fixed capital formation to GDP climbed to a peak of 35.6% in 2007 from 26.5% in 2003 and then slipped to 26.4% in 2017.

The gyration was similar in the ratio of domestic saving to GDP, which rose to a peak of 38.3% in 2007 from 29.2% in 2003 and relapsed to 29% in 2016.

According to the finance ministry's economists, such sharp swings in investment and saving rates have never occurred in India's history; "not during the balance-of-payments crises of 1991 nor during the Asian Financial Crisis of the late 1990s".

The survey traces the beginning of the current decline to 2012 and believes it was "still continuing as of the latest date, that for 2016".

"With the slowdown now having lasted at least five years, it has already surpassed the typical duration of slowdown episodes; if it continued through 2017, as seems likely, it would have reached the six-year duration recorded in the exceptionally severe cases. Yet because the investment decline has been so gradual, the magnitude of the shortfall so far is relatively less severe – it remains a moderate 21 percentage points, well under the average magnitude".

Apparently, the savings slowdown set in much earlier in 2010, and it was also "still continuing".

Looking at the nature of India's investment slowdown and other similar cases, the survey points out; "the median country reverses only about 25% of the decline 14 years after the peak (2007), and about 40% of the decline 17 years after the peak (2007). If India conforms to this pattern, the investment-GDP ratio would improve by 2.5 percentage points in the short run".

It said, "Of course, this is the median: if India situates itself in the upper quartile, it can recover by more than 4 percentage points. But India is already 11 years past the peak, and its current performance puts it below the upper quartile".

India seemed to have been resilient as despite a "large fall in investment" it has paid a "moderate cost in terms of growth".

"Between 2007 and 2016, rate of real per-capita GDP growth has fallen by about 2.3 percentage points—that is lower than the above 3% decline in growth noticed, on average, in episodes in other countries that have registered investment declines of similar magnitudes and from roughly a similar peak (about 36%)," states the survey.

Aditi Nayar, principal economist at rating agency Icra, told DNA Money that a broad-based revival in investment was still two-three quarters away.

"In our view, a broad-based pick-up in investment activity is unlikely to set in for two to three quarters. At present, the constraints pertain to which sectors need fresh investment and which entities have strong balance sheets to undertake investment, in the absence of which funding would have to be arranged from banks or the markets. ' she said.

According to her, capacity utilisations continue to be low in many sectors. The availability of distressed brownfield assets in many sectors may also prevent fresh investment.

"There is tremendous scope to drive economic growth through investment in infrastructure, but funding may pose a constraint," said Icra's economist.

She expects the credit growth in the immediate term to be driven by retail demand and working capital needs.

"We expect credit growth of 9-9.5% in FY18, but it may not be driven by investment activity. Retail demand and working capital needs related to higher commodity prices are likely to drive credit off take in the near term," she said.

The survey says policy action by the government could "decisively improve the outlook" for investment reversal that push up India's growth rate to 8%-10%.

These included; "Step-up in public investment since 2015-16; and now, given the constraints on public investment with policies to decisively resolve the TBS (twin balance sheet) challenge. These steps will have to be followed up, along with complementary measures: easing the costs of doing business further, and creating a clear, transparent, and stable tax and regulatory environment. In addition, creating a conducive environment for small and medium industries to prosper and invest will help revive private investment. The focus of investment-incentivising policies has to be on the big and small alike. The 'animal spirits' need to be conjured back".

VEXED MATTER

• India's investment to GDP ratio slowdown relatively moderate in magnitude, long in duration
   
• The drop in the ratio is linked to the corporate balance-sheet troubles, which may pose a big challenge