Indian Economy, 5th edition (135 page)
Read Indian Economy, 5th edition Online
Authors: Ramesh Singh
Part of
the reason
for the general slowdown in consumption could be that higher inflation tends to reduce real disposable incomes of households. Growth of durable goods consumption (under the assumption that growth of consumption for these items would not be significantly different from the growth in production) may have slowed even further recently, because high interest rates and resulting high monthly instalments restrained purchases. At the same time, the seasonally adjusted consumer non-durable index of industrial production (IIP), which is typically a smoother series than durable goods production, has been picking up since August 2012.
Investment
The growth rate of the economy since 2003-04 has been strongly correlated with investment rate.The investment rate averaged
34.5
per cent between 2003-04 and 2011-12, much higher rate than before. The real growth rate in the economy averaged 9.5 per cent per annum during 2005-06 to 2007-08, which were also the years when the
growth rate of investment
in real terms averaged around 16 per cent. Similarly, the average growth rate of the economy was close to 9 per cent per annum in 2009-10 and 2010-11, with the growth rate of investment averaging around 16.2 per cent in these two years. The rate of growth of GDP was lower in the years when growth rate of investment was low, as was the case in 2008-09 and 2011-12. The private sector is the major source of investment in the country. Within the private sector there are two categories of investors, viz. the private corporate sector and household sector.
As per the First Revised Estimates released by the CSO in January 2013, gross domestic capital formation as a ratio of GDP at current market prices (investment rate) is estimated to be
35.0
per cent in 2011-12 as against 36.8 per cent in 2010-11. Both public and private investment declined as a share of GDP. Within private investment, investment by the private corporate sector registered a sharper decline.
The
reduction in private investment
could be attributed to a number of factors.
i.
First is the increase in policy rates (to combat inflation and inflationary expectations). Between March 2010 and October 2011, the RBI raised the repo rate by 375 basis points (bps),thus raising the cost of borrowings in a bid to reduce demand.
ii.
Another reason for lower private investment could be lower demand for Indian exports from the rest of the world, particularly the advanced countries.
iii.
A third possible reason for lower corporate investment is policy bottlenecks (such as obtaining environmental permissions, fuel linkages, or carrying out land acquisition), which led to a number of large projects becoming stalled, which may in turn have discouraged new investment.
Recent Investment Trends
Two trends in investments stand out viz., rising stalled projects and falling project starts. To study these, the Survey uses the data from the
CaPex
database of the Centre for Monitoring Indian Economy (CMIE), which tracks investments at a project-specific level.
i.
Rising Stalled Projects:
There has been a surge in projects where implementation has stalled. Both in value and volume terms, stalled projects have been rising since early 2009. As of December 2012, six sectors accounted for about 80 per cent of all stalled projects, which were electricity, roads, telecommunication services, steel, real estate, and mining.
ii.
Falling Project Starts:
New investment projects have been drying up across sectors, partly as a consequence of rising stalled projects which reduce the ability of firms to start new ones. New projects of both private sector and government have been falling. Government projects peaked in March 2010 and private-sector projects peaked two quarters later. Ever since, private sector investment levels have been lagging government investments by about six months.
iii.
Causes of slowdown:
Several factors are believed to have caused the stalling of investments and drying up of new investment. A CMIE study
(“Sharp Increase in Projects Shelved”
, CMIE, May 2012) shows that in 2011-12, 20 projects accounted for almost 70 per cent of total cost of shelved projects. An analysis of these 20 individual projects suggests difficulties in land acquisition, coal linkages, and mining bans as major causes. Analysis of other stalled projects suggests that policy issues such as in telecom spectrum allocations have also played a role. Several sectors such as consumer non-durables, which are less subject to the type of permissions described above and are more driven by demand conditions and GDP growth, are also seeing a slowdown in new investments. For example, there is a slowdown in new investments in manufacturing food and agro-based products. Lack of growth and slowdown in investment are feeding into each other, with causation flowing both ways. High interest rates have contributed to the depressed investment climate as well. However, given the stability in the repo rate between April and December 2012, the latest quarterly data suggest that interest costs of companies have moderated slightly.
iv.
Way forward:
The government has taken some steps to kick-start investments. The Cabinet Committee on Investments (
CCI
) has been set up to fast-track projects more than Rs. 1,000 crore. The Land Acquisition and Rehabilitation and Resettlement (
LARR
) Bill, which has been cleared by the Cabinet, could bring greater clarity, reduce uncertainty, and thereby aid investments. Investments by cash-rich public-sector units (PSU) have the potential of crowding-in the private sector. Progress on the Delhi-Mumbai Industrial Corridor has the potential of providing a fillip to the investment climate of the country. Policy rate cuts by the RBI and improving business sentiments could also support a revival in investments.
In what follows, the recent trends in various components of investment are discussed to understand the decline in overall investment rate.
To
summarise
, overall investment would have slowed further were it not for non-productive investment such as in valuables. Particularly worrisome is the sharp slowing of corporate investment, which is the source of future supply (needed to quell inflation) and of future growth potential. Policies to remove investment bottlenecks as well as structural reforms to encourage productive investment and its financing are essential, as is more accommodative monetary policy, as inflation abates.
Net Exports
Growth in net exports can be an important source of demand. Unfortunately for India, net exports growth has been low because of global weakness. The
World Economic Outlook
(WEO) Update released by the IMF in
January 2013
put the rate of growth of world output at 3.9 per cent in 2011 and 3.2 per cent in 2012, down from 5.1 per cent in 2010. For the advanced economies, the growth rate was much lower at 3 per cent, 1.6 per cent, and 1.3 per cent for 2010, 2011 and 2012 respectively. The growth rate in the faster growing emerging economies also fell over this period.As a result of weak growth in trading partner countries, Indian exports also declined. In the first half of FY 2012-13 (April-September 2012), there was a steep decline in exports while imports did not decline as much in percentage point terms.
Inelastic oil imports
were the primary reason for the relatively smaller decline of imports. But gold imports, which have surged in recent years on the back of higher perceived returns on gold holdings, contributed significantly to imports, even though they declined in value over the previous year. As a result of the widening of the trade deficit and moderation in net invisibles surplus, the CAD worsened to 4.6 per cent of GDP during H1 of 2012-13 as compared to 4.0 per cent of GDP in H1 of 2011-12
*
.
With investment, consumption, and net exports all slowing in 2012-13, only an increase in government spending could hold up economic growth. But the government deficit had already shot up as a result of past expansionary policy to pull India out of the post global financial crisis slump. And it increased further as slow growth diminished revenues.
Public Finance
Following the global financial crisis and the slowdown in aggregate demand that followed,
fiscal stimulus
was injected in 2008-09 and 2009-10 and the fiscal deficit of the centre increased to 6.0 per cent and 6.5 per cent of GDP respectively. Fiscal consolidation resumed in 2010-11 with a partial withdrawal of the fiscal stimulus. With growth in GDP recovering sharply in 2010-11, the fiscal deficit of the centre declined to 4.8 per cent of GDP. A large part of this was on account of the growth in nominal GDP in excess of 20 per cent.
This momentum could not be sustained in 2011-12 as growth faltered. The fiscal deficit of the centre widened to 5.7 per cent of GDP in 2011-12 (as per the Provisional Actuals). The dynamic nature of the relationship between macroeconomic outcome and the fiscal outcome was manifest thus: the sharp slowdown in industrial output led to a slowdown in overall GDP growth affecting tax revenues, particularly corporate income tax (the hitherto most buoyant source) the persistence of inflation that necessitated a tight monetary policy stance to rein in demand also dampened investment; subdued financial markets that hampered the planned disinvestment programme, resulting in slippage over Budget Estimates (BE); and continued high levels of global prices of crude oil and fertilisers with inadequate pass through to domestic consumption led to higher-than-budgeted subsidy outgo. Thus, the slippage in fiscal deficit in 2011-12 resulted from slippage of 35 per cent in revenue receipts, 23 per cent in disinvestment receipts and recovery of loans, and 42 per cent in expenditure outgo.
The Gold Rush
1
1.
Demand for gold has been rising worldwide :
The global financial crisis, turned debt crisis, has seen a steep rise in commodity prices, especially gold. This, now in hindsight, rather unsurprising fact, has mostly been driven by the meteorically increasing demand for safe havens to park the world’s savings. Global gold prices, as denominated in US$, have doubled since 2008, and increased three times as denominated in Indian rupees.
2.
India has traditionally been a major absorber of world gold :
The last three years have seen a substantial rise in gold imports (the value of gold imports increased nine times between January 2008 and October 2012), contributing significantly to the current account deficit along with oil.
3.
Gold imports are positively correlated with inflation :
High inflation reduces the return on other financial instruments. This is reflected in the negative correlation between rising imports and falling real rates. Even though real rates have started rising, they are barely in the positive territory.
4.
Reduce Gold Purchases to curb CAD :
Given soaring energy and transportation needs, since there seems to be little we can do to temper oil imports, gold is the component that needs to be contained to bring the CAD back to a comfort zone.
5.
The demand for gold as an investment tool has been increasing over time
2
:
Gold has been a combination of investment tool and status symbol in India. With limited access to financial instruments, especially in the rural areas, gold and silver are popular savings instruments. The recent economic uncertainty has seen people across the board buy gold. Almost all of India’s demand for raw gold is met through imports
3
. The composition of gold has seen a steady movement towards non jewellery items. Anecdotally, this can be construed as a rising demand for pure investment, predominantly in the urban and semi-urban areas. In the last quarter, non-jewellery constituted 40 per cent of the total demand. This observation, in line with global trends, is easily explained by the declining real returns on the gamut of financial instruments available to the investor and soaring ones on gold (23.7 per cent annual average return between April 07 and March 2012 versus 7.3 per cent return on Nifty and 8.2 per cent on savings deposits, Sehgal et. al., 2012).
6.
The longer term way to address the rising demand for gold :
The overarching motive underlying the gold rush is high inflation and the lack of financial instruments available to the average citizen, especially in the rural areas. The rising demand for gold is only a “symptom” of more fundamental problems in the economy. Curbing inflation, expanding financial inclusion, offering new products such as inflation indexed bonds, and improving saver access to financial products are all of paramount importance.
These macroeconomic developments broadly continued through the first half of the current fiscal. Concerns were raised in many quarters about the deterioration in the fiscal position for a second year in a row and the credibility of the fiscal policy stance. Recognising that some of the assumptions made at the time of budget formulation needed to be reviewed and corrective policy measures put in place, the government appointed a
committee
headed by
Dr Vijay Kelkar
to chalk out a roadmap for
fiscal consolidation
.
Following its recommendations, the government unveiled a revised fiscal consolidation roadmap in October 2012:
•
It targeted a fiscal deficit of 4.8 per cent of GDP for 2013-14 and through a correction of 0.6 percentage point each year thereafter, a fiscal deficit of 3.0 per cent of GDP in 2016-17.
•
Controlling the expenditure on subsidies will be crucial. Domestic prices of petroleum products, particularly diesel and liquefied petroleum gas (LPG) need to be raised in line with the prices prevailing in international markets. A beginning has already been made with the decision in September 2012 to raise the price of diesel and again in January 2013 to allow oil marketing companies to increase prices in small increments at regular intervals. The number of subsidised gas cylinders has also been capped at nine.