The latest CSO figures on incomes and investment reveal a conflicting story on investment. While investment (Gross Domestic Capital Formation, or GDCF) shows a slight fall between 2007-08 and 2008-09 in the CSO’s figures that take 2004-05 as the base year, it shows a marginal increase when the base year is 1999-2000. Numerical inconsistencies aside, there are certain trends in India’s growth story that are highly robust to changes in base years and different data definitions. First, the household sector has been saving and investing greater amounts throughout the slowdown period. Second, its investment in both financial and physical heads has been growing. Third, agriculture investment is once again taking off. Further, quarterly growth trends also reveal a reversal of the falling trend in investment growth. In other words, the first two quarters of 2009-10 have seen investment levels as measured by GDCF go back towards the long-term growth trend.
One of the greatest fears of large government expenditures and a high fiscal deficit was that greater government borrowings would crowd out private investment. The investment figures suggest that though crowding out remains a fear, growth of investment by the household sector has not been inordinately affected by high fiscal deficit. Moreover, with the current interest rate regime where real interest rates are hovering in the negative quadrant, private corporate sector investment is expected to increase over the next few quarters. In other words, the government’s increased deficit has been more than compensated with high growth expectations that run deep and wide throughout the economy. And it is these growth expectations that are driving India’s investment story.
Where is the investment originating from? While foreign direct investment has been growing through the slowdown years, it remains a small component of the total, and the bulk of the investment is being facilitated via increased household savings throughout the slowdown and post-slowdown period. The fact that savings rates have been increasing over a long period (though they have dipped marginally in the last few quarters) suggests the relative inelasticity to short- and medium-term interest rate fluctuations. Household savings rates held up despite the slowdown, private corporate sector savings also dipped only marginally, and non-departmental enterprises of the government also held up. The slowdown in savings growth during 2008-09 was primarily due to the government administration. This further indicates that investment in the productive segment of the Indian economy has remained highly robust to short-term international fluctuations, and augurs well for the future.
Together, all these figures (though admittedly provisional) reveal that the Indian economic growth story of the last few quarters is not merely driven by increased government role in the economy via the stimulus package, but runs far deeper. Households have been saving a greater share of their incomes, investment climate has been largely unaffected, the financial sector has withstood the fall of equity markets very well, and increasing inflation has not as yet affected any of the other macro-economic parameters perceptibly, though that does not imply that all this will continue for ever. Not only is GDP growth back on track, the investment story indicates that this growth will be sustained. It is time for the government to address the only weak component of the Indian economy — deficit and fear of high inflation. The Reserve Bank of India has already shown the way for the finance minister to start the process of withdrawal of the stimulus package.
