Is sluggishness in investment demand a price we pay for efficiency?

Greater efficiencies in infra sectors and saturation of under-served markets have reduced the need for capital investment; national accounts should capture these in GDP calculations, writes T N Ninan

Could it be that success rather than failure explains, partially, the sustained sluggishness in investment demand — which in turn has affected overall economic growth? Consider, for a start, the demand for heavy trucks, which reportedly fell by 22 per cent in recent months. The principal cause seems to be new rules announced last July, allowing trucks to carry heavier axle loads. That step may have been prompted by the improved quality of highways. Whatever the reason, the same trucks can now carry more freight, so the demand for new trucks has dropped. Meanwhile, manufacturers are looking at re-designing their vehicles for the new axle load levels.

 
Or take the demand for diesel-generating (DG) sets, which is less today than it was a decade ago. Indeed, demand fell more than 40 per cent between 2010-11 and 2015-16, but has recovered partially since. The primary reason: The number of telecom towers reached saturation point, so the demand for the category of DG sets that power these towers collapsed by 70 per cent. Demand has picked up since because of other sectors, but the absence of power shortages in most parts of the country has meant that DG sets are now used in 90 per cent of cases as stand-by. If the reliability of power supply were to improve further, even stand-by demand for DG sets would come down.

 
The creation of more than adequate power-generation capacity in the country complements this story, for new capacity creation (other than in renewables) has dropped to virtually nothing. The figures are striking: New generation capacity created in 2013-14 was 17.8 Gw. This rose to 23.9 Gw two years later, but new capacity added in the first 11 months of the current year is all of 2.3 Gw — a tenth of what it used to be. Despite this, there is headroom available in terms of idle capacity as actual generation has not kept pace. Elsewhere in the power sector too, new capacity for power transmission and for transformer capacity have peaked and then dropped off, though not quite as dramatically as with generating capacity.

 

There may be other sectors where similar trends may manifest themselves, like the railways. Unprecedented sums have been poured into investing in new rail capacity and upgrading facilities, yet the railways have shown virtually no growth if you consider the freight and passengers carried on the system. Thus, the net tonne kilometres of freight carried has grown in total by a miserable 3.6 per cent in the last five years, while total growth in passenger kilometres was less than 1 per cent in the three years to 2016-17. Of course, revenue did much better because tariffs have been raised, but you don’t need big new investments for that. Perhaps traffic will grow only after the two rapid freight corridors are completed, and when speeds on the existing system improve subsequently. At that point, you could expect to see investment in the railways also peaking and then slowing, just when the railways show good traffic growth!

 
The last example is provided by telecom, where Reliance and the other companies poured massive sums into their infrastructure in recent years. All telecom companies other than Reliance are now steeped in debt, and unlikely to keep investing at the same pace. Meanwhile, the sharp drop in tariffs engineered by Reliance has caused a spurt in data traffic on mobile phones, but at rates so low that one is not sure how national accounts would measure such activity.
 
The short point is that, in key infrastructure sectors, greater efficiencies and the saturation of under-served markets have reduced the need for capital investment on the same scale as earlier. At least some of the downstream effects would register as an economic slowdown. Meanwhile, Uber and Ola may be partially responsible for the drop in car demand. And in aviation, if the gap between two aircraft taking off or landing is halved, runway efficiency is doubled. These are all examples of improved productivity, which national accounts are supposed to capture in calculations of gross domestic product. But do they?