Investment activity hits historic low in FY21 amid Covid-19 pandemic

This is because of the lockdown in Q1; sharp pick-up in Q4 may not sustain, say experts

Investment activity revived to a seven-quarter high and demand recovered to a five-quarter high in the fourth quarter of financial year 2020-21 (Q4FY21), but this may not sustain because of the impact of the second wave of Covid-19 on rural demand and corporate spending, feel economists.

The better-than-expected economic growth in Q4 was largely led by a spike in government spending and a double-digit growth in investment activity, owing to a low base.

However, for the whole of FY21, growth in investment and consumption touched a historic low as the country grappled with the impact of the nationwide lockdown in Q1.

Devendra Kumar Pant, chief economist at India Ratings & Research, said that although FY22 will see a strong growth, mainly because of lower base of FY21 (worst economic growth performance of the post-independence era), the consumption and investment outlook remains bleak.

“Due to base effect both consumption and investment growth will remain positive in the first half of FY22. However, it will be too early to term this a revival on account of a host of factors. The monthly core infrastructure data is still patchy and uneven. 

Due to localised and regional lockdowns, non-essential sales are not taking place and inventories are being piled up with manufacturers/stockists.    

Government capital spending growth is low and household investment is unlikely to pick up any time soon,” said Pant.

According to the data released by the Controller General of Accounts (CGA) on Monday, the capital expenditure was 3.1 per cent lower than the revised estimates of Rs 4.38 trillion.

Gross fixed capital formation (GFCF), a proxy for investment, declined by 10.7 per cent in FY21, compared to a 5.4 per cent growth the previous fiscal. In fact, this is the lowest ever. The previous low was a contraction of 9.5 per cent in 1957-58. The GDP data is available from 1950-51. In fact, the share of investment in GDP declined to 27.1 per cent.

Demand, as indicated by private final consumption expenditure (PFCE), declined by 9.14 per cent in FY21, versus a growth of 5.5 per cent in FY20. The previous low in PFCE was a decline of 9.1 per cent in 1979-80. Share of PFCE in GDP declined to 58.6 per cent from 60.5 per cent the previous year. However, it grew in Q4 at 2.56 per cent, after posting contraction in the first three quarters.

Pant added that urban consumption may hold due to sustained economic activities/wage income, but rural consumption will take a beating due to Covid’s spread there. A large portion of health care expenditure is in the form of out-of-pocket expenditure by households. And the fear of a third wave is likely to alter consumption expenditure of lower- and middle-income households as they may spend mostly on essentials and cut back on non-essentials, Pant said. Besides, low capacity utilisation and weak demand in unlikely to encourage corporates to investment, he added.

While the share of GFCF and PFCE in GDP declined, that of government spending increased to 12.5 per cent from 11.2 per cent in FY20 and 10.8 per cent in FY19.

Government spending for the full year as suggested by the government final consumption expenditure was down to 2.9 per cent, compared to 7.8 per cent in FY20. Government spending saw a 28.2 per cent growth in the last quarter of the fiscal.

Nikhil Gupta, chief economist at Motilal Oswal Financial Services, pointed out that if one excludes government consumption spending, real GDP actually contracted by 1.1 per cent in the last quarter.

Rumki Majumdar, economist, Deloitte India, said the economy was gaining momentum before the second wave hit. 

“Economic activity to pick up rapidly in the second half of the fiscal as falling infections, a potential increase in the pace of vaccination, and the oncoming festivals in the following months will likely boost consumer and investment spending owing to strong pent-up demand,” said Majumdar.

Aditi Nayar, chief economist, ICRA Ratings said the pickup in GDP growth in Q4, while broad-based, was boosted by a spike in government spending, reflecting the back-ended expenditure by the Centre, an improvement in investment activity, and a mild turnaround in private consumption. “As expected, net exports reported a deeper drag on GDP, and we expect the current account deficit would have enlarged in Q4FY21,” added Nayar.