A lighter shade of green

As the Central Government completes 100 days in office, there is encouraging news in the form of GDP growth touching 5.7 per cent in April-June, the highest in 10 quarters. But even better is the 7 per cent year-on-year increase in gross fixed capital formation (GFCF), the highest since April-June 2011. The roots of the current slowdown go back to the decline in growth of GFCF — a measure of investment in new factories, infrastructure and other fixed assets taking place in the economy — that started from around the second quarter of 2011-12. Since then and until the last quarter, growth in GFCF has lagged behind even that of GDP. This is opposite to what it should be in any dynamic emerging economy. In fact, India conformed to this pattern during its boom years from 2003-04 to 2010-11, with growth of capital stock (contributing to future production growth) consistently exceeding that of GDP.

But it is not clear whether the 7 per cent GFCF growth in April-June is a one-off thing, given that it comes on the back of a minus 2.8 per cent year-on-year increase recorded for the same quarter of last year. Moreover, there aren’t too many visible signs of an investment recovery underway in terms of new greenfield projects being taken up or even contemplated. True, we have greater macroeconomic stability now than a year ago — on the rupee, the twin deficit front or inflation. There is also no doubt that ‘sentiment’ has returned to the markets ever since it became clear India would have a stable government in New Delhi. The fact that it has put in place proper systems of governance and decision-making — missing in the earlier regime — has also aided sentiment. We are, however, yet to see this positive sentiment translate into confidence among businesses to actual invest.

The challenge before this government, in the next 100 days and beyond, is to carry out reforms without which sustaining the current sentiment will not be easy. Investors want to see real action — on Goods and Services Tax, subsidy rationalisation and more industry-friendly laws on land acquisition, labour and environmental clearances — before committing themselves to projects with large outlays and long gestation. Having burnt their fingers badly in the previous boom and piling up huge debts in the process, the corporate sector is not in a position to risk a repeat today. An investment recovery, in other words, is going to take time and one way the Government can help is by keeping its side of the bargain. Besides, it can help kick-start investment through direct capital spending on infrastructure projects. But this again requires eliminating non-merit subsidies and other wasteful expenditure, enabling redirection of taxpayer money towards productive investments and production of public goods.

COMMENT NOW