India reported another set of dismal GDP number today, with Q4 2012-13 growth at 4.8% and the year's cumulative growth at 5%. While there is evident weakness across categories of GDP, in this post we look at one specific category of the GDP that has been a source of concern for sometime - investments. In this post, a version of which appeared first on IndiaSpend, Orbis Economics' Manika Premsingh takes a deeper look at Indian investments. (Note: the article was written before the Q4 GDP release, so those numbers are not included in this analysis).
While India was seen as part of
the new haloed ‘BRIC’ group at the turn of the century; a key emerging economy
for the future, voices of how it might, a decade later, be a lost story have
got louder over the recent past. Is the pessimism justified? We cannot say for
sure, for the verdict itself is still out there. But, what we can do is try and
understand what has led India to its current predicament.
One look at India’s recent
economic performance and it is clear that India’s growth has fallen way below
average. Growth in the Indian economy, as measured by the gross domestic
product (GDP) for the last quarter fell
to a decade low, coming in at 4.5%, in
stark comparison with the average growth of 8% over the past decade. The
economy’s GDP release shows two categories – GDP by economic activity and GDP
by expenditure, which are essentially reflections of each other.
GDP by economic activity
comprises of three sectors – agriculture, industry and services. GDP by
expenditure is essentially the usage of incomes generated in the economy. It
comprises the private final consumption expenditure (PFCE), which is nothing
but spending on various goods and services by the consumer; government final
consumption expenditure (GFCE), which is government spending on various goods
and services in the economy; gross capital formation (GCF), which is
essentially the domestic investments and net exports, which is exports less
imports.
Tumbling domestic investments
A close look at the expenditure components
of India’s national income reveals that one of the major drags on GDP growth in
the recent past have been domestic investments or GCF. Investments have been
the most unimpressive aspect of India’s economic growth or in other words
minimal growth in investments has significantly contributed to slowing down in
India’s growth in the recent times.
Why is the investments component
so important for India’s growth? First, the contribution of investments (which
are defined as the sum of gross fixed capital formation, change in stocks and
valuables) to overall GDP for the third quarter of 2012-13 is at a falling 34% on
account of very little growth in the component over the recent past.
As per the Central Statistical
Organisation’s (CSO’s) advance estimates, GCF or investments are expected to have grown only at 3.9% in
2012-13, despite having been a no show in 2011-12 as well (growing by a
negligible 0.5%). This is in stark contrast with the two prior years when
investments grew in double digits (see chart). Not only does this hit overall
GDP growth, it is also a reflection of how investments in the economy have come
tumbling down. The combination of slowing global economic activity, its impact
on domestic economic activity and high inflation are some of the reasons for
slowing down in investments.
Gross
capital formation (2004-05 prices, market prices)
|
|
Year
|
Growth
|
2005-06
|
16.2
|
2006-07
|
13.4
|
2007-08
|
18.1
|
2008-09
|
-5.2
|
2009-10
|
17.3
|
2010-11
|
15.2
|
2011-12
|
0.5
|
2012-13*
|
3.9
|
* CSO projections
|
|
Source: CSO
|
Recession and inflation impact Indian investments
During buoyant economic times,
investments trends to be robust as well, since business sentiment is upbeat and
preparing for future opportunity requires investment today. The reverse happens
during recessions, when risk-taking ability declines as does the optimism for
the future. The lack of perceived future demand further reinforces challenging
economic times, making it a chicken and egg situation. Further, during years
when growth is expected to slow down or has already slowed down, incomes in the
private sector become stagnant or grow slowly. This leads to either lower
absolute real incomes or lower growth in real incomes, where real income is
measured as income adjusted for the effects of inflation. So, rise in prices or
inflation remaining the same, if incomes have not grown over the year,
effectively real income is less than what it was during the previous year. With
prices rising and incomes remaining unchanged or growing slowly, consumers need
to spend more and more to run their households. This, leads to less in the
hands of the consumer to save and invest and gets reflected in overall
investment slowdown overtime.
Thus, it is not surprising, that
in GCF, has grown at 1.4% over the April-December 2012-13 period in comparison
with the corresponding period of the previous year. This is an even more
disappointing number in light of the fact that in during 2011-12 it grew by
1.9% per cent, which was a low enough rate as it is. This growth also compares
rather unfavourably to other components of the GDP like private final
consumption expenditure and government final consumption expenditure at 2.9%
and 5.7% respectively. (see table for more details).
GDP at market prices (2004-05), Rs
crore, April-December
|
||||
% of GDP
|
% growth yoy
|
|||
2011-12
|
2012-13
|
2011-12
|
2012-13
|
|
Private Final Consumption Expenditure
|
61.1
|
60.7
|
7.4
|
2.9
|
Government Final Consumption
Expenditure
|
11.2
|
11.4
|
9.0
|
5.7
|
Gross capital formation
|
40.7
|
38.1
|
1.9
|
1.4
|
Gross Fixed Capital Formation
|
34.1
|
33
|
5.0
|
0.1
|
Change in Stocks
|
2.3
|
3.4
|
-30.0
|
50.5
|
Valuables
|
2.4
|
1.7
|
3.5
|
-28.1
|
Exports
|
24.3
|
24.3
|
16.1
|
3.3
|
Less Imports
|
33.7
|
34.4
|
20.5
|
5.6
|
Discrepancies
|
-1.7
|
0
|
-62.1
|
-97.8
|
GDP at market prices
|
100
|
100
|
6.8
|
3.6
|
Sources: CSO, Orbis Economics
Estimates
|
Added to this situation, is the
fact that Indian inflation has been quite high in the recent times, at over 7%
in 2012-13 and almost 9% in 2011-12 as measured by the Wholesale Price Index
(WPI), India’s headline inflation index. At a recessionary time, this has led
to the Indian consumer being squeezed on both sides – on the one hand incomes
have not grown and on the other hand prices have risen quite fast. As a result,
a savings and investment slowdown was only to be expected.
Is an investment pickup possible?
The current conditions in
investments while worrisome, do not entirely call for a write off in the India
story. Why? Because, it is a typical phenomenon seen during a recession and a
recession is a fact of economic cycles. There are no booms without busts and
vice versa! While policy impetus can soften the impact of a recessionary
scenario, it cannot entirely do away with a recession. We have to wait for the
cycle to turn, and that turn is already becoming visible to a small extent.
Inflation, for one, has come off to acceptable levels, which can be a spur for
savings and investments. India’s interest rates are being softened, which is
also a plus and policy reforms have revived foreign interest in India. So a
turnaround is quite possible even if it takes some time.
Read the article as it was published on IndiaSpend here
Excellent article, i had a great read on it. It gives insights on our Indian Economy and the GDP.
ReplyDeleteThanks Jenny! Please feel free to write in at orbis.economics@orbiseconomics.com if you have any other suggestions or comments, they would be most welcome!
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