A general election lurking around the corner and India coming out ahead of its peers in terms of how it recovered from the Covid pandemic leads us to question how robust this economic recovery is, the contributors to growth, and the funding sources of such growth. A nation’s growth can be driven by its residents’ consumption, investment by the private corporate sector, government spending, and net exports. Investment is a critical growth driver since it builds the economy’s productive capacity and allows for non-inflationary consumption or consumption not serviced through imports.
However, India’s investment has been a cause for constant worry over the past decade. Data from the Reserve Bank of India on the ratio of Gross Capital Formation (GCF) to Gross Domestic Product (GDP) at current prices—the measure for the gross domestic investment in India—shows that such investment had continuously fallen from its peak of 39.8% in 2010-11 to 33.8% in 2018-19, even before Covid. This had further shrunk to 30.7% in 2019-20 and then to 27.3% in 2020-21 due to a Covid-induced slump.
While 2021-22 witnessed growth in investment to 31.4%, recent data suggests a definite revival of private investment in 2022-23. An RBI study provides data on the projects financed by banks and financial institutions, finances raised through external commercial borrowings or the Initial Public Offering (IPO) route—all of which point to a robust investment outlook in India in 2022-23. In 2022-23, 982 projects were at the investment plan stage, with a total capital outlay of ₹3,52,624 crore—higher than the capital outlay seen in any year since 2014-15.
The impact of these outlays on growth, were they to fructify, would depend on the marginal propensity to consume (MPC). Such MPC refers to the proportion of a raise in income spent on consumption, not saved. Based on data from 1990-2020, the MPC for India has been estimated at 0.5. Increases in investment are linked to increases in GDP through the Keynesian multiplier, which is calculated by the value 1/(1–mpc). Based on an MPC value of 0.5, the Keynesian multiplier for India at a macro level would be 2, and thus an investment of ₹3,52,624 crore would lead to a doubling of the GDP to ₹7,05,248 crore.
Data also suggests robust capex recovery, not merely in volume terms but also in terms of the quality of investment projects. Thus, more than two-thirds of these investment projects are large and mega-sized projects, involving project costs of ₹1,000 crore to ₹5,000 crore, and above ₹5,000 crore, respectively. Most of these projects financed by banks and financial institutions (more than 93%) are investments in green field (new) projects. In comparison, modernisation and expansion projects account for a tiny proportion of the total project cost (6.1%). Of the total projects sanctioned by banks and financial institutions, a majority (60%) are infrastructure projects, of which roads and bridges hold the maximum share. Other industries that have witnessed intent to invest in capex include metal and metal products, construction, textile, and food products.
That such an investment recovery is not just a chimera is corroborated through the movement of specific coincident indicators. For instance, the increased investment in the construction sector is attested through increases in steel consumption and cement production. In contrast, increased investment in machinery and equipment is evident from increased imports and production of capital goods.
The sustainability of an investment-led growth model is contingent on its funding. The question to ask in this regard is: Are we funding our domestic investment through our own (domestic) savings, which refers to the total of private (corporate and household) savings and public savings? Or are we relying on external savings to fund such investments? If it is the latter, we open ourselves to the risk of a rising Current Account Deficit and its attendant consequences.
India has had a continuous saving-investment gap between 2004-05 and 2019-20, leading to domestic investments being funded externally. More importantly, the Gross Domestic Savings as a proportion of Gross National Disposable Income (GNDI) has also gone down from a peak of 37.8% in 2007-08 to 31.7% in 2018-19 and further to 28.2% in 2020-21, when household savings fell due to Covid-induced factors. Such gross savings increased to 30% of the GDP in 2022-23, led by the government reducing its dissaving. The resultant saving-investment gap of 1.4% represents a tolerable Current Account Deficit since it lies within the 1–2% range considered optimal for India.
It thus appears that India has finally cracked the Saving-Investment code to improve growth, managing to gradually reverse the declining trends in Savings and Investments, even while the S-I gap remains within tolerable limits.Yet concerns regarding the sustainability of capex revival remain.
One, many investment projects are not broad-based and are skewed towards very few Indian states. Thus, in 2022-23, just five states—Uttar Pradesh, Gujarat, Odisha, Maharashtra, and Karnataka—accounted for a 57.2% share in total project costs. Again, while Uttar Pradesh and Odisha have significantly increased their share in the total project costs sanctioned by banks and financial institutions, the share of Maharashtra, Karnataka and other states has reduced compared to the period between 2013-14 and 2020-21.
Two, as the rating agency Moody’s pointed out, curtailment of civil society and political dissent and the associated political strife are likely to impede the completion of investment projects.Finally, India must pay attention to maintaining low and stable inflation. It is essential to consolidate our small wins for growth.
(Views are personal)
Tulsi Jayakumar
Professor, Finance & Economics and Executive Director, Centre for Family Business & Entrepreneurship at Bhavan’s SPJIMR
(tulsi.jayakumar@spjimr.org)