Revival of investment is one of the questions that experts are asking when it comes to Indian business.
These days, everyone is talking about Make in India, ‘start-up India, stand up India’, skills India and many other things. All these policy initiatives depend on investments from stable sources that have not put up a good show. In fact, in December last year, new investments fell down to a 13-year low with the value of upcoming projects depleting to more than half of what it was in the previous year. Such a low was last seen in 2004. The numbers have been released by a report from Centre for Monitoring Indian Economy (CMIE). The critics say that the investment cycle in the country is unlikely to see any major change. Despite the threat of outstanding figures of growth from China of about 42.86 per cent, the Indian investment market is showing a lean growth and is expected to be so for the time to come. Gross Fixed Capital Formation, as a parameter of GDP, was 34 per cent in 2011 but has steadily been reducing each year and fell to 27.12 per cent in 2016.
Companies begin to cut back on production in times of lower output, fearing lower profit margins leading to a gap between growth and capital investment. Most capital investment is a vicious cycle that also contributed to recessions of 1991 and 2008. But the worries may be dumbfounded if we take a closer look at the need for such investments. These kinds of investments are the only way to increase productivity of labour when innovation is still in the incubation stage. However, that does not mean that any kind of investment is good for the economy. The real estate investment went up to 16 per cent before the 2008 financial crash as against the norm of 4-6 per cent GDP growth. As a result of low capital formation, Japan also witnessed a lower rate of growth during the 90s. However, it was deduced that the lower rate of accumulation of capital was because of lower return on investment on misallocated resources in the previous years. China’s undisciplined investment is also another example of not being able to enjoy the fruits of investment.
What caused the breakdown and delay in investment in India was the number of scams that hit the Indian economy within a period of two years from 2010-12. The repeated number of discovery of scams led to a cloud of uncertainty in the minds of investors which led to them not showing a keen interest in investing in the Indian economy. However, the Indian industry is equally to blame when it comes to lower investments. As the capital formation became lower, it led to lower profits. Over-investment in certain sectors like telecom, power and steel led to over-dependence on such sectors causing lower rate on return.
Experts are now hopeful as they see the end of this vicious cycle. With higher credit growth of 10 per cent and a stable Gross Fixed Capital at 15 per cent, the winds of revival have been strong. They consider it paramount to have a stable economy rather than a bubble economy like Japan or China.